Development of Environmental Risk Profiles for Construction Firms

July 2004

To succeed today, contractors need to incorporate environmental risk management into every facet of their business operations. Developing an environmental risk profile that covers mold and other exposures can help contractors understand and outline what risks will be contractually transferred, managed with education, financed through insurance, and so forth.

by Jeff Slivka
New Day Underwriting Managers LLC

By now, many construction firms have acknowledged the fact that environmental exposures exist on virtually every construction project in the world. In fact, many have taken the opportunity to assess Contractor's Pollution Liability or CPL insurance and I would even say most have purchased it.

There is one thing that tends to confuse me, however. (Honestly, there are many things that confuse me, but let's stick to this one.) Many construction firms I speak with that have purchased CPL coverage have not even created a risk profile of their operations. My simple question is how can you make such a purchase if you never assessed or developed an environmental risk profile? Do you know what risks will be contractually transferred, managed with education, financed through insurance and so forth? Is the CPL policy supposed to dictate how you manage environmental risk? It shouldn't. Remember, insurance is only a way to finance a loss that occurs, not proactively protect the one thing you probably try to preserve the most—your organization's reputation.

Developing an Environmental Risk Profile

To succeed in today's world, the first step taken by contractors is to incorporate environmental risk management into every facet of their business operations. To do otherwise invites disaster. The second step (assuming that the contractor admits that exposures exist!), is identifying specific risks—creating an environmental risk profile or ERP. Contractors face environmental exposures in the following four major areas of their operation.

• Job site operations
• Owned or leased properties
• Transportation
• Disposal liability

Mold and Other Exposures

One of the most highly publicized environmental issues facing the industry today is the existence or growth of mold and related fungi. While the legal community has taken to the fact that mold-related injuries and damages can actually support or establish an entire law practice, the scientific community has yet to confirm and document actual adverse health effects from mold exposure. Therein lies the reason for an exponential increase in mold lawsuits throughout the country.

While mold is one type of risk exposure, there are many other environmental exposures (see prior articles for information). The focus here is to provide a little insight into developing your own risk profile. This can be completed simply by a thorough review of your administrative controls. Looking at such documents and protocol to identify strategies/procedures to reduce, minimize, or eliminate exposures to environmental liability or ones that expose the organization to risk. Such documents would include the following.

• Environmental management programs/systems (if any)
• Mold/moisture prevention/awareness/response program: Is there a consistent message to all employees? Is there a consistent and role-defined response to water/mold so as to prevent future liability? Are subcontractors required to adopt such protocol? Is this in the prequalification list for subcontractors?
• Hazard communication programs: Are environmental data searches performed as part of the preconstruction process? Note: You can find much information on the project site or around the site you may be working on or bidding on in just 10 minutes on the various EPA Web sites (see prior articles).
• Standard subcontract agreement with environmental subs and nonenvironmental subs: Do we require them to?
• Standard client agreement (if possible) or standard industry agreements like the AIA 201 general conditions: If CPL insurance is required by the owner and they are willing to pay, why do we still negotiate the requirement out of the contract? Are we really putting the company at more risk by doing this?
• History of environmental losses or incidents—trends, communication to employees, "lessons learned," what corrective measures were taken to prevent the same problem in the future? Are you accessing and sharing industry information?
• Corporate brochure or statement or qualifications: Are your services over stated for "marketing" purposes?
• Annual report (if available): Contingencies that we may be sitting on that is costing us dollars? Potential lawsuits involving environmental conditions?
• Corporate health and safety program: Training and adequate response protocols defined for contaminant exposures?
• Quality assurance programs: Third-party inspections?
• CPL Insurance: What can't we insure? Do employees understand?
• Environmental assessments on properties: Is the question asked of the owner? Are employees aware? What is the protocol in the event environmental issues are identified? Is it consistent or will we take it on if the margins are high enough?

Conclusion

These are some things to think about. By no means is this an all-inclusive list to create a comprehensive ERP but it helps you begin. Those who have taken this path—good for you! Those who have not, for peace of mind and protection against potentially disastrous financial losses, consider getting it on the "to do" list—very soon. Keep in mind, if you decide that this is where you may want to begin, you can easily engage an environmental consultant to assist in developing this document for you. Working with someone on the "outside" with the expertise and experience to hone in on environmental risk may provide you with a unique approach with different perspectives. Either way, start it today!

---

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.