Managing Environmental Liabilities through Contracts
January 2003
Environmental hazards or contamination are
routinely found at construction sites. There are also many provisions for managing
environmental risk through contracts. Some uncommon provisions to watch out
for that may reduce exposure to environmental risk include: the owner's disclosure
of environmental information; the preexisting contamination clause; the change
in conditions provision; responsibility for ownership, transport, arranging,
and disposing of waste; and environmental insurance requirements.
by Jeff
Slivka, ARM
New Day
Underwriting Managers LLC
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.
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