Managing Environmental Liabilities through Contracts

January 2003

by Jeff Slivka, ARM
Gallagher Environmental Risk & Insurance
Arthur J. Gallagher & Co.

Many are aware of the various contractual methods for managing the variety of risks found at construction sites. One area that needs a bit more attention is the real and perceived environmental hazards or contamination routinely found at construction sites. This article explores the uncommon provisions for managing environmental risk through contracts.

Owner’s Disclosure of Environmental Information

First and foremost is information. Typical disclosure statements must specifically reference information relative to the “environmental” condition of the site. Such information could include the obvious—underground tanks information and environmental assessments. But there should be no problem requesting information relative to various permits issued to the site (if working at an active facility), such as notices of violations or fines for releases or discharges and various hazardous substances used or in use at the site.

Depending on the level of effort you want to put forth, there are even Web sites that can provide you with environmental information about the site you are looking to put your workers on. All known conditions should be disclosed.

Preexisting Contamination Clause

Similar to typical indemnity agreements but specific to both known and unknown contamination, a preexisting conditions clause indemnifies the contractor in the event environmental liability attaches merely because of the existence of contamination. For example, if there is existing contamination of an owner’s site due to leaking underground tanks, historic disposal practices, etc., the owner or general contractor will indemnify the contractor for such liability. However, these clauses usually will not indemnify the contractor for exacerbation of conditions or for other contamination releases that the contractor causes by its own actions or omissions.

Preexisting contamination clauses are typically constructed from constituents found in environmental assessments but can also be constructed with general terms attached. The latter should extend to claims that arise out of, are related to, or are based on actual, alleged, or threatened discovery, discharge, dispersal, release, escape, migration, or seepage of any contaminant or pollutant. Contaminants or pollutants can reference various environmental statutes, however, with the way society has sensationalized the issues surrounding “toxic” mold, it would be prudent for the creator of such clause to ensure that microbiological, bacterial, mold, fungus, etc., are found in the definition as well.

Change in Conditions Provision

A change in conditions, specific to environmental conditions or contamination, should also be contemplated. Many times, contamination is found during the course of work. For example, the excavation contractor finds the leaking underground tank no one suspected was there, or the drywall contractor performing work in a hospital finds mold infestation. Does the contract spell out how each party is supposed to respond? The answer is sometimes, yes, but many times, no.

A change in conditions clause will allow for the owner and contractor to ensure proper procedure is followed in the event problems are encountered. Will the contractor be responsible to remediate or remove newly discovered contamination? Will it be the responsibility of the owner? Are change orders warranted? What about work stoppage as a result of the contamination? All these seem so obvious until it happens. Then we go to the document that is supposed to govern the relationship, and find it’s not clearly defined.

General response procedure on the part of both parties should be clearly spelled out in order to solidify how each should respond. However, this clause should be general enough to apply to a myriad of unexpected conditions.

Responsibility for Ownership, Transport, Arranging, and Disposing of Waste

Tremendous liability can be assumed when transporting and disposing, or arranging for the transport and disposal of various wastes generated at the site. Such language should ensure the owner acknowledges the fact that the contractor is not and never intends to become an “arranger,” “operator,” “generator,” or “transporter” of hazardous substances as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA, also known as “Superfund”). In keeping with this mindset, contractors must also be careful not to sign waste manifests as owners or generators of hazardous wastes.

To date, there have been many contractors identified (maybe misidentified) as potential responsible parties under Superfund laws for arranging for the transport of hazardous waste. Ultimately, this may not relieve a contractor of its responsibilities under Superfund but may act as a solid first line of defense.

Environmental Insurance Requirements

Although the environmental insurance marketplace has developed to the point that typical contractor’s pollution liability (CPL) coverage is extremely affordable, very few contracts require it. A CPL provision in the contract will provide a few benefits as follows.

• Reinforces the indemnity provision in the event the indemnitor no longer has the financial capability to fund a loss.
• Acts as a “pre-qualifier” since most environmental underwriting requirements are quite rigorous.

When it comes to insurance, thought should also be given to whether or not it should be specific to a project, or is evidence of general environmental coverage enough?

Conclusion

Using one or all of the above provisions—along with other typical provisions such as a clear scope of work (the scope of work or services must clearly stipulate if the contractor is to perform environmental services), health and safety requirements, limitation of liability statement, etc., may reduce exposure to environmental risk. However, in the end, it’s still only a contract and regardless of how clear, concise, and complete it may be, it still may not completely remove a party from environmental liability.

Copyright © 2003. IRMI.com

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The Value of Safety

November 2002

by Ron Prichard, P.E. PhD.

In today’s world of construction, the struggle for attention of senior managers is growing in intensity as competing demands multiply with the complexity of projects. Safety is but one need, and often relegated to secondary importance, especially if things seem to be going well. Thus, the “holy grail” for safety professionals everywhere is: “how do I ensure that that safety gets on and stays on the radar screen of the firm’s principals?” One of the semantic struggles in this “battle for the high ground,” is the debate about safety being a priority or a value. For a long time, safety was neither. Those who put safety as a priority recognize that this is an important step in gaining management commitment to safety. Those who favor the “safety as a value” proposition have given the “safety as an over-riding priority” proposition a try, and come up short. The purpose of this article is to address some points as to why safety deserves placement in an organization as a value, and some of the obstacles to be overcome in gaining this status.

What Is Value?

In this article, “value” refers primarily to relative worth, utility, or importance. In demonstrating that safety can be shown to have value in the sense of having importance, it can then be more easily shown to have value in the sense of worth.

In trying to demonstrate “value,” the most common inclination is to gravitate toward economics. This is done on the general basis that decisions in business are principally based on the finances involved, with the objective to gain an economic advantage from taking an action. While this is the primary orientation of people in trying to make their case, an examination of the issues involved will show why this is difficult, and should be only one of several means to demonstrate worth.

In the strict sense of worth, one must first understand the evaluated (or “real”) economic value of safety. This is a net financial measure, generally based on the costs of two elements. The first element is the cost of nonsafety—a financial measure of the losses. At a minimum, this number is a function of accident costs, direct and indirect, plus the additional costs of workers compensation insurance above unity (based on a premium with an EMR of 1.0). In the event that there are lawsuits, fines, and increasing general liability premiums as a function of nonsafety, these costs might also be added in. This number must be combined with the costs of providing safety functions—a measure of the prevention of losses. This aspect was covered in detail in a previous article. What it might total, and how these numbers are used to arrive at a net worth depends upon the detail to which the costs are seen as real, the selected basis of comparison, and other decisions with regard to computing the costs.

Putting a Price on Value

As a result, the “value” from an economic standpoint, can be quite fungible. Therein lays the quandary faced by most safety professionals, in trying to convince management that safety should be a value. Dollars are seen as a “hard” measure of worth, but with regard to safety they are a function of so many variables, that it is tough to make a purely economic case. In addition, numbers, no matter how well supported, are necessary, but insufficient to make the case until they are converted into a term more recognizable by management. In this case, return on investment (ROI), payback method, or the net present value method are the primary financial measures most often used to gauge the economics of a decision. The choice depends upon what is most typical in your enterprise, and that choice will drive the method of selecting and computing costs.

Now, while creating a set economic value for safety is a difficult challenge, there are a variety of other intangible methods of calculating value which are worthy of consideration. Under some circumstances, these benefits, while difficult to assign an economic value to, may be worth far more than any financial measures. When the benefits of these additional factors are combined, they show a significant worth for working safety, and making it a part of the culture of the enterprise. Each of these factors will be addressed briefly. The first set describes financially related benefits, and can be worked into the economic worth of safety. The second set defines more indirect benefits. In addition, some of the value of safety is a function of comparison to the consequences of nonsafety. Elements in this later category will also be described.

Financial Benefits. What gets measured gets managed; it is a truism of all human activities. In addition, who gets measured drives the accountability chain. Thus, without accurate financial measurement, it is not possible to gauge actual cost, and without actual cost, it is impossible to accurately gauge ROI.

Safety records tie into insurance premiums for both workers compensation and general liability. Workers compensation premiums are billed against each labor hour, at the rate of the particular trade, and modified by the safety performance. General liability premiums are related to type of work, value of work in place, and losses. In both cases, safety performance plays into the cost of the insurance, and the insurance plays a cost role in the hourly wage rates on projects. Thus, safety is a major cost driver within the labor component of project costs. Project costs, a function of bidding and managing work, are thus tied to safety. Good records mean better profitability. It can also mean the difference between winning work, or not.

Accident costs have two components: direct and indirect. Only direct costs are insurable. Unfortunately, they are only a fraction of the full, actual cost of accidents. Indirect expenses are generally a multiple of direct costs, and depend upon the severity of the particular event. The more severe an incident, the higher the associated indirect expenses. The difference to the recoverable costs of accidents and the true total cost can only be paid out of company profits.

Lawsuits are generally an outcome to be expected when accidents occur, as people are dissatisfied with the worker’s compensation benefits as a sole remedy. In the event that the accident involves a third party—either a subcontractor employee or a member of the public—nonsafety most likely will involve participation (with all associated legal expense) in lawsuits as those parties seek additional financial recovery.

OSHA inspections and fines will often result in the event of nonsafety. In this case nonsafety can be an incident with multiple injuries or a fatality, which leads to an event-trigger for an OSHA site visit. Alternatively, nonsafety can be an event-trigger for a complaint inspection, or a scheduled OSHA site visit. In all three of these cases, failure to be in full-compliance with OSHA requirements (a component of non-safety) can lead to citations and fines. The full cost of an OSHA fine, generally thought to be the value of the actual fine, is like an accident. There are also indirect costs related to diversion of management to deal with the issues, the cost of legal counsel in the process, and numerous other indirects.

Intangible Benefits. Accidents lead to reactive management. In a post-accident situation, management is focused on dealing with the fallout of the event, and reacting to the outcomes. When they are thus engaged, their talents are being squandered with regard to what they were specifically hired to do: run projects. Safety looks forward to prevention of negative events. This frees up management attention to advance the job.

In addition, negative publicity is always attendant with accident, often attracting media attention. The greater the calamity, the more attention generated. This will undermine the effects of marketing. It is one factor in determining reputation of performance (and another factor in owner selection).

Safety, however, is an outcome, a function of the interaction of methods, means, materials, manpower, and the plans. It is not something you do; it is something you get. As a result, good safety means that projects are also running well, and other key objectives are also being satisfied. Safety involves people. Good safety records mean that the work is managed well, and things are done properly. It also means that those actually performing the work, and exposed to the chance for personal injury, are going home intact at the end of each day. This factor can attract, and help retain a quality workforce. In today’s world, this becomes a valuable asset.

Safety is a precursor for completed operations exposures and a “red-flag” warning for failures of construction management methods. Safety just shows up early, as the failures have no “time lag” or latency period. Safety happens (or not) as the work is being performed. Quality issues have variable latency periods, before their effects manifest themselves. These results are being used increasingly as a discriminator in selection of winners in bidding for construction projects. Owners typically are placing selection hurdles on safety performances measures to screen out average or below average performers.

Safety can be shown to have a straight economic value, if one is willing to go to the trouble to compute it. However, as the elements just discussed show, there are many more significant benefits from safety. In trying to convince people as to why they should care, it is these items, not the financial measures, which should dominate the discussion.

Copyright © 2002. IRMI.com

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Debunking the 13 Myths of Construction Safety

May 2002
by Ron Prichard
Aon Worldwide Resources

Be wary of hanging onto mental models for action just because they are popular.―William L. Livingston

For the past few decades, safety has become a mantra, something that everyone supports and few are willing to scrutinize or criticize. However, following the advice of conventional wisdom only leads to a knowledge deficit—a growing gap between is believed to be true and what is actually is true in real application. Information reliability is the crucial element in decision-making.

This knowledge deficit is not restricted to the field of construction safety. The entire field of safety is laboring under many pieces of folklore masquerading as fact. A real gap in understanding has emerged, creating a barrier to the development of good information. Fortunately, the existence of many myths and misconceptions within the safety field is now beginning to attract attention.

This article provides a list of general safety myths. These commonly held beliefs about construction safety result in misconceptions that drive improper actions. Following the current "wisdom" can create mischief in action; an exercise in accelerated error. The reality, once expressed, becomes self-evident. As Dr. Rudolf Starkermann once said to me, "When you get to the top of the mountain and look down, the best path to the top becomes obvious." Below, then, are some paths that, while they look fine on the surface, can prove to be quagmires.

Myth 1: Safety Is Achievable

It is simply not possible to totally escape risk. Risks can be transferred or ignored, but they cannot be evaded. Risks involve the dynamic of the future, for which no certainty can exist. Even if you use the National Safety Council (NSC) definition of "safety" (the control of recognized hazards to attain an acceptable level of risk), it is still a nearly impossible proposition to achieve safety.
What is acceptable to one person is not to another, and this difference is not trivial. Even if you confine the determination of acceptability to the same person, what is acceptable one day in one situation might become completely unacceptable later. The even larger issue of how to address unrecognized hazards creates still more difficulty since many things are not recognized as hazards until after they manifest themselves. Clearly, safety is not achievable by any stretch of the imagination.
However, many companies have achieved zero accidents; it is a routine accomplishment throughout the United States. The record of the Construction Industry Safety Excellence Awards have shown that both owners and contractors can complete projects without any accidents through a combination of effort, attention, the proper actions, and even a bit of good luck. Thus, while safety itself is not achievable, having nothing bad occur and having no accidents are possible.

Myth 2: Safety Is a "Thing" or an Activity

The myth is that you go forth and do safety. In realty, safety is a result, an outcome of actions. Safety is what you get if things are done properly and events go as planned. Even for movie stunts, the definition of a task executed as intended is that it looks real and is safely done. Accidents happen because things occur that prevent the task from proceeding as intended.
Keeping the task on course as intended, even with disturbances, assures a safe task. Productivity, quality, and safety have always gone hand in hand. Preemption consists in designing systems to control the effects of disturbance to the intended process. Problems arise from attempting to deal with safety as a "thing" or an activity, for which responsibility is assigned to some party.

Myth 3: Safety Is Best Dealt with Separately, as Its Own Function

Separating safety as a separate function severs connections with the operating systems delivering results. With no connection to the process as a whole, safety options appear to be selected in an impulsive, random, and uncoordinated manner.
When safety is set up in its own department in an organization, personnel—consciously or unconsciously—transfer responsibility for safety to the department or individual with the title. Safety is seen as someone else's job. This separation creates a barrier, particularly for the flow of information, which only adds to the obstacles to be surmounted.

Myth 4: OSHA Compliance Generates Safety

Compliance with the Occupational Safety and Health Act (OSHA) ensures one thing: compliance with OSHA. If no accidents result, count your good fortune. Safety directors and insurance company representatives can cite insurance statistics showing that OSHA Voluntary Protection Program (VPP or "STAR" ) sites in compliance with OSHA with average or worse-than-average injury rates.
OSHA has developed an extensive series of rules for situations, which are supposed to be linked to the prevention of accidents. However, no rulebook can ever cover every situation, a reality that even OSHA recognizes. Through the catch-all clause known as the "General Duty," OSHA essentially states that if a situation arises with hazards you recognize but which is not covered by a rule, you have the obligation to fix the problem as though a rule existed.

Myth 5: Those Construction Firms That Do Not Include Safety Have Lower Bids

Those who work safely have higher productivity, less worker turnover, and less waste. Thus, the contractor who produces the best safety results should have the best bid, since it has numerous competitive cost advantages. The safer contractor will have lower overhead costs, insurance costs, labor costs, and also superior management methods and work practices. Additionally, contractors with bad safety records are going to be recognized as dangerous by the workers, resulting in higher labor turnover. Turnover adds to the costs of the unsafe contractor, through increased costs for training, increased production costs due to lower skill levels of his labor force, or increased accidents. Research has shown that newer workers have a higher rate of accidents on the job. Where there is no process to gauge the full value of the strength of a contractor's process at project inception, the final tally will prove that it would have been cheaper to hire the safer contractor at the beginning.

Myth 6: Safety Programs Will Solve the Problem

Simply creating a safety program only results in possession of a program, not a solution. Having a process designed to deliver safety as an outcome, and managing the effort required to produce it, is significantly different than just having a safety program. It is entirely possible, and it occurs with too high a frequency, that construction firms have a safety program but not a safe record. OSHA requires a program, and is moving toward a mandate for the specific composition and organization of those programs. This action is driven by the mistaken assumption that mandatory components will somehow automatically deliver the desired results.
The idea came from the realization that those contractors who have good safety records also have good safety programs, as though they are directly, causally linked. Many consultants and organizations are willing to assist contractors in meeting this requirement. However, too often a program is developed simply to insure that some legal requirement is met. Thus, it is developed entirely separate (the same problem noted above) from the other business practices of the firm. The result: generally a large binder (or binders) with multiple chapters dealing with a variety of subjects sits on the shelf and gathers dust. The requirement is satisfied, but safety results do not improve.

Myth 7: Auditing and Site Inspections Deliver Safety

Auditing and inspections can provide an indication of what kinds of problems are occurring on the construction site and where they are happening. The effort of inspecting does nothing to change the reason for the problems discovered. It does not even provide information as to the root cause of the problem. An inspection, by itself, simply identifies that a deviation from intended results has occurred. Thus, an inspection program, by itself, delivers only reports of failure or nonconformance to desired results.
The same holds true for safety. Safety is an outcome, the result of processes and actions. Auditing and inspections can help improve the system, by highlighting weaknesses in and deviations from the existing process, but they add value only if the information they generate becomes a trigger for action and are acted upon. All too often, the inspections are conducted, the results tabulated, and then things go on the same as before. Nothing changed. This creates the illusion that things should somehow be functioning properly.

Myth 8: OSHA Statistics Measure Safety Performance

OSHA statistics measure non-safety. All OSHA measurements are based on the failure of the process; fatalities, lost workday, and recordable injuries, and the number of days lost per lost workday injury. Safety, under the OSHA statistics approach, is measured by the occurrence of events, known as mishaps or near misses.
What safety statistics currently measure is the occurrence of what you want to avoid -- the negative results or the rate of failure. These results, showing at what frequency and with what level of severity injuries are occurring, are really measuring non-safety. Since the negative thing did happen, it manifested itself on the job site, leaving a trace to be measured. Thus, "safety" statistics really measure non-safety.

Myth 9: Incentive Programs Produce Lasting Behavioral Changes and Improved Performance

Incentive programs are toxic waste for any social system. Over a period of time, they come to be seen as entitlements. At best, the connection with the intended behavior and the reward gets lost. At worst, it drives reporting of injuries underground, completely defeating the purpose. This myth is extremely popular as the "carrot" approach to motivating desired behavior. [Alfie Kohn, Punished by Rewards (Boston: Houghton Mifflin, 1993).]

The idea behind incentive programs is that if people can receive special awards for safe behavior, that is what will be delivered. These programs are usually recognized by the presence of tangibles, such as belt buckles, hats, jackets, coolers, and other giveaways. This trinket approach to safety has a substantial constituency and is the source of much advertising dollars for industry publications. When things start to go bad, an incentive program is always the first thing chosen to try to affect change.
Incentive programs, at best, can affect moderate positive changes in behavior over the short run. If left in place for an extended time, the level of awards has to be increased to get the same effect. The connection between behavior and reward is gradually lost, reducing the effectiveness of any reward program. Some efforts to overcome the negative aspects are to make it a "group thing," whereby the incentive is given to all, but only if the entire group succeeds. If a reward becomes sufficiently significant, the primary incentive to is conceal negative behavior.

Why do companies persist in maintaining incentive programs proven to undermine morale, productivity, and the stated objectives? I have concluded that giving things away makes management feel good, look benevolent, and helps to strengthen a sense of power.

Myth 10: Disciplinary Programs Are the Key to Enforcement and Results

Getting rid of undesirable behavior does not automatically produce desired behavior. The only credible enforcement mechanism is individual ethics. Disciplinary programs can help promote desired behavior by punishing undesired behavior, but cannot be relied on as the sole remedy.
The same problem that exists with incentives exists for punishments. If the punishment is not administered sufficiently close to the negative behavior, the connection between behavior and punishment is lost and it becomes a demotivator. The emphasis on this approach often shows up on office walls in the familiar sign, "The floggings will continue until morale improves." Yet, history has repeatedly demonstrated that no amount of coercion is sufficient to gain more than a temporary modification of behavior.
It is simply not possible for everyone to have a supervisor to ensure that the rules are being implemented constantly. There must be reliance placed on the individual worker to do the right thing. This means that selection, hiring, training, and the compensation programs play as crucial a role in promoting desired behavior as the disciplining of those who commit infractions of the rules. Discipline therefore is simply another part of a coherent, complete system.

Myth 11: The Solution Lies in Finding Some New Technological "Fix"

No complex problem is ever resolved by the introduction of a new technology, particularly if the underlying social system remains undisturbed. On the other hand, adding a new technology without sufficient consideration of how it fits into the existing system can exacerbate an existing problem rather that solve it. By introducing more complexity without expanding the capacity of the system to manage it, a new technology can overwhelm an existing system, and create social problems among those using it.

For example, consider falls. Many new technologies exist, including the use of harnesses, shock-absorbing lanyards, retractable connecting cable reels, and a variety of other ingenious fall prevention mechanisms now on the market. Still, falls remain the leading cause of fatalities in construction. [Charles R. Culver and Jim Scott, "OSHA Examines Construction Fatalities," Safety +.]

Myth 12: Construction Is Too Complex and Dynamic

In reality, we know what causes accidents, and we know what needs to be done to effect change. We know how to solve problems. We know how to deal with complexity. We know how to develop controls and systems to deal with dynamic situations. We have access to advanced technology, enhanced information, and increasing knowledge about sociology and group dynamics.
The record also shows that achieving zero accidents is the result of a well-planned and coordinated effort. The problem is that none of these things is easy to implement. It takes a commitment to make change, money to make the changes, and a redistribution of power to those with responsibility to perform the task. The process is not simple (although many of the actions individually are) mainly because it involves removing the power of the prerogative of management.

Myth 13: Safety Associations Are Really Interested in Solving the Problem

There is an unacknowledged codependency between the associations that serve safety professionals and the problem of safety. As long as safety results remain stable and within an acceptable range, there is no general outcry for a solution, and the need for the safety profession remains. This is not meant as an indictment of the profession for doing what all professions do—advancing the interests of those within the profession. Just open any professional magazine and look at the editorials and member information. It's quickly apparent whose interests are being promoted, and rightfully so.

Conclusion

The construction safety industry is a multi-billion dollar per year business. However, it can be argued that it's not even a recognized profession. No governing body has responsibility for the field. No university majors in the subject are offered. No professional journal exists as a forum for the debate of ideas. The key construction safety words and terms have not been precisely defined nor standardized.
These all represent major weaknesses, and result in a void of good, reliable knowledge available to those trying to produce results in the field. The absence of so many critical elements clearly explains the failure of industry wide solutions to emerge as well as the prevalence of the 13 myths examined above.
Copyright © 2002. IRMI.com

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