IDENTIFYING AND ALLOCATING ENVIRONMENTAL ISSUES 
IN
 
BUSINESS AND REAL ESTATE TRANSACTIONS 

Prepared by:

Lawrence P. Schnapf, Esq.
Schnapf Environmental Law Center
55 E.87th Street # 8B
New York, New York 10128
(212) 996-5395  (Telephone)
(503) 213-9314  (efax)
Lschnapf@environmental-law.net (e-mail)
www.environmental-law.net (website)

copyright (c) 2000 Lawrence Schnapf

Companies enter into business and real estate transactions to achieve strategic business objectives. Sometimes, a company wants to expand or diversify its product lines. Other times, a purchaser may want to enter new geographic areas or needs to increase the size of its operations in order to compete effectively in the global market. Sellers, on the other hand, may desire to shed business units or facilities that are not profitable or that may no longer be a part of the company’s core business. 
Environmental liabilities can interfere with or undermine the objectives of these transactions. If a purchaser is planning to change product lines or other modifications to plants that require new or modified permits, the purchaser may not be able to implement its business plan until the permits are obtained. Similarly, if the plants will be subject to new regulatory requirements, the plants may not be able to operate at full operational capacity and thus could impact future business earnings. 
In addition to environmental compliance issues, newly acquired business units may have liabilities associated with soil and groundwater contamination. These liabilities may arise from currently owned or operated facilities, may be associated with business units that were sold off in the past by the company being acquired or related to plants that were previously owned or operated. If the company being acquired sent hazardous wastes to off-site disposal or recycling facilities which cleanup actions are required. If contamination from the plants is migrating to adjacent properties, the company could also become subject to toxic tort or property damage claims. 
	Following acquisition, a purchaser may decide to consolidate operations in order to reduce operating expenses. The consolidation may involve shutting down obsolete or inefficient plants. During the process of decommissioning a plant, it is not uncommon to encounter unexpected environmental contamination especially in states which require environmental investigations before a plant can be closed.
	Companies that detect environmental liabilities after the closing may have to reserve these liabilities on their books and disclose them in their financial statements because of new accounting rules and enhanced enforcement by the federal Securities and Exchange Commission. Thus, environmental liabilities may not only impede purchasers from implementing their business plans but also have an impact on a company’s overall financial performance.
	 Typically, senior management has reached an agreement in principal to sell the assets or stock of a business which is subject to a number of conditions including the completion of a satisfactory environmental review.  The parties are anxious to close the deal and have agreed that the agreement of sale will be executed in six weeks with the closing scheduled a month later. Sometimes, there is no agreement at all. Instead, the purchaser is one of several bidders for the assets and the seller has agreed to allow the prospective purchaser to have review all of the seller’s business records for a three day period at a designated data room. Based on this information, the purchaser has to develop a bid and propose a contract. 
 Often times, this arrangement does not provide purchasers with sufficient time to meaningfully examine the environmental liabilities associated with these transaction. The process of identifying environmental liabilities that are associated with complex manufacturing plants is a time-consuming process. Moreover, it is usually not possible to estimate what the likely liabilities may be until after a cleanup plan has been approved by a governmental agency which can take place months or even a year or so after the closing. As a result, the time pressures of a particular transaction often force the contracting parties to try to allocate environmental liabilities before they are completely understood. One consequence of this truncated approach may be that one of the contracting parties may inadvertently assume environmental liabilities. This article will discuss how to conduct streamlined and effective environmental due diligence so that the parties can effectively deal with environmental issues. In addition, this article reviews the  risk management techniques that parties to a corporate transaction may use to allow their transactions to be consummated.
I.	OVERVIEW OF ENVIRONMENTAL LIABILITY IN CORPORATE TRANSACTIONS
There are a number of federal environmental statutes that may impact business transactions. Following is a review of those principle statutes. 
A. Clean Water Act (CWA)- The law prohibits the discharge of pollutants into the waters of the United States without a permit. This law also regulates stormwater runoff, oil spills and the filling in of wetlands. While businesses that discharge wastewater to publicly-owned treatment plants (POTWs) are not directly regulated by the CWA, the POTWs are required under the CWA to ensure that industrial users of their systems install pollution control equipment so that their discharges do not interfere with the treatment processes of the POTWs.  If existing CWA permits are to be transferred to a purchaser, it is important for the purchaser to determine if the seller has agreed to undertake any corrective action or treatment upgrades since the purchaser will assume responsibility for these future obligations. In addition, permittees are required to monitor their discharges and submit the results of the sampling program to state environmental authorities in monthly discharge reports (“DMRs”). Permittees are strictly liable for violations disclosed in the DMRs. Environmental organizations and citizen groups may use the violations contained in the DMRs to seek penalties or injunctive relief from the permittee. Purchasers who acquire the stock of permittees or who assume the liabilities associated with assets that are being conveyed can be held responsible for violations that occurred prior to the transaction. 
B. Clean Air Act (“CAA”)- This law regulates emissions of pollutants into the atmosphere. New sources of air pollution and modifications to existing emission sources must obtain air pollution control permits. Since the emission standards established for a particular emission source depend on the air quality where a facility is located, similar plants in different regions of the country may be subject to different emissions standards. Because the CAA imposes particularly onerous requirements on the chemical industry, purchasers need to review their review existing permits requirements prior to the closing. If a purchaser intends to institute changes in operations at a chemical plant such as change in hours of operations, substitution of raw materials or new products, the purchaser may have to obtain  permit modifications for the affected existing emission sources which could delay implementation of the operational changes. In addition, increasingly stringent air emission requirements may be imposed under the air toxic programs and the new state operating permit programs. Chemical plants can have significant emissions from vents and valves as well as stacks so these air toxic programs can require significant operational changes or physical modifications to plants. As a result, purchasers need to also determine what the future permit requirements for a plant will be in addition to reviewing the current regulatory requirements. 
C. Resource Conservation and Recovery Act (“RCRA”)- This law establishes standards for the generation, storage,  treatment and disposal of hazardous wastes. Generators of hazardous wastes are required to properly handle hazardous wastes. Large generators of hazardous wastes may not store the wastes for more than 90 days  and must prepare manifests for wastes that are shipped off-site for treatment or disposal. Facilities that treat, store or dispose of hazardous wastes (“TSD Facilities”) must obtain permits and comply with RCRA design and operating standards. 
Generators and TSD Facilities may also be required to take corrective action to remediate soil and groundwater that is contaminated with hazardous wastes and their constituents. These corrective requirements apply to areas of a facility that are currently being used to treat, store or dispose of hazardous wastes as well as hazardous waste management units that are about to be closed or taken out of service. Particularly important to purchasers of chemical facilities, corrective action orders may be issued to require current owners of facilities to remediate contamination in areas where hazardous wastes or their constituents were managed or disposed in the past.
In addition to fines and permit revocation, the government and private plaintiffs can seek injunctive relief to order to compel cleanup of hazardous wastes that are causing an imminent and substantial endangerment. 
	D. Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”)- Under CERCLA, environmental authorities can undertake a cleanup of contaminated sites and seek reimbursement from potentially responsible parties (“PRPs) or order PRPs to cleanup sites. In addition, private persons and PRPs who incur cleanup costs can seek reimbursement from other PRPs.
	1. Liability Under CERCLA - CERCLA imposes liability on four classes of potentially responsible parties (“PRPs”) for the cleanup of releases or threatened releases of hazardous substances. These PRPs include the present or former owners of facilities or vessels (e.g. tanks) where the release or threatened release occurs (“owners”), present and former operators of a facility or vessel (“operators”), persons who arranged for the disposal, treatment, or transportation of hazardous substances (“generators”), and persons who accepted hazardous substances for transportation to a waste disposal site (“transporters”). Liability can be imposed on current owners or operators even where they were not responsible for the contamination.
	PRPs are strictly and retroactively liable for the cleanup costs at a site. When the government brings an action to recover cleanup costs, liability is also joint which means that one PRP could be liable for the entire costs of cleaning up a site. This, if a company qualifies as a generator because it sent hazardous wastes to a site which subsequently was released into the environment,  the generator may be liable to the government for all of the cleanup costs associated with that site even though there may be other PRPs for that site. If the government decides to proceed only against that one generator, the company would have to file its own action for contribution against the other PRPs at the site. However, in a contribution action between PRPs, liability is not joint but proportional. In contribution actions, courts have used the following equitable factors to allocate liability among PRPs:
•	The ability of a PRP to distinguish their contribution to the discharge, release, or disposal of contaminants at a site;
•	The amount of the hazardous waste generated by the PRP;
•	The degree of toxicity of the hazardous wastes generated by the PRP;
•	The degree of involvement by the PRP in the generation, transportation, treatment, storage or disposal of hazardous wastes at the site;
•	The degree of care exercised by the PRP with respect to the hazardous wastes, taking into account the characteristics of the waste; and
•	The extent that the PRP has cooperated with federal, state or local officials to prevent any harm to the public health or the environment.
2. Defenses to CERCLA Liability-There are only three statutory defenses to an action brought by the government: Act of War, Act of God and the Third Party Defense. The most commonly asserted defense is the third party defense. However, this defense is extremely limited because the release of hazardous substances must have been SOLELY caused by a third party who was not in a contractual relationship with the defendant. Thus, a purchaser cannot use this defense if the contamination was caused by the seller since the sales and purchaser agreement would qualify as contractual relationship. 
	Even if a current owner can get past the “contractual relationship” barrier, there are two additional hurdles it must satisfy before it could assert a third party defense. The owner would have to also show that it took reasonable precautions against the acts or omissions of third parties and that it exercised due care regarding the hazardous substances at the property. In other words, the purchaser could not simply allow third parties to dump wastes on its property or could not allow previously deposited drums to deteriorate while it owned the property. 
	Because of the third party defense was unavailable to new landowners who did not cause the contamination at a site, Congress enacted the innocent landowner’s defense in 1986. This defense provides that a purchaser will not be considered to be in a “contractual relationship” and thus be able to assert the defense if the purchaser could establish that it had no reason to know about the contamination. To establish that it had no reason to know, the purchaser would have to show that it undertook a reasonably appropriate inquiry into the past uses and practices of the property that was consistent with good commercial and customary practices. In reality, this defense has been largely unavailable because most courts have ruled that if the purchaser did not discover the contamination prior to the transaction, it probably did not conduct a sufficient inquiry.    
	3. Liability of Successor Corporations Under CERCLA- The general rule in most American jurisdictions is that a corporation which acquires the assets of another company is not liable for the actions of its predecessor. Over the years, the courts have developed four exceptions to the general rule of non-liability for asset purchasers.  The purpose of these exceptions is to make sure that corporations do not evade their liabilities or to prevent corporate evasion of liability or debt through the use of corporate formalities.
	Because successor corporations are not specifically referred to in CERCLA, some courts initially ruled CERCLA did not apply to those successor corporations. However, it is now generally agreed that Congress intended successor corporations to be liable under CERCLA. In defining what exactly constitutes a successor corporation, most courts will look to state law with its four traditional exceptions since corporations are creatures of state corporate law.
Under this traditional approach, asset purchasers will be considered corporate successors if one of the following applies:
•	 Assumption- The purchaser expressly or impliedly assumes the liabilities of the seller;
•	De Facto Merger- The transaction amounts to a de facto merger or consolidation so that the surviving corporation assumes the liability of its predecessor. The important concept in this exception is not the continuation of the business operation but the continuation of the corporate entity;
•	 Mere Continuation- Under this exception, a corporation will be held to be a successor if there is are the same  shareholders, directors and officers); and 
•	 Fraud- The transaction was fraudulently entered into to escape liability.
Courts tend to strictly construe these exceptions. As a result, plaintiffs have had a difficult prevailing against asset purchasers particularly under the "de facto" and "Mere Continuity" tests where courts have required a high degree of continuity in management, personnel and stockholders.
Because of the difficulties encountered by plaintiffs seeking to impose liability on successor corporations under traditional corporate law, some jurisdictions have adopted two additional exceptions for imposing liability upon successor corporations.
•	Product Line Exception-  Under this doctrine, a successor corporation can be held liable for the acts of its predecessor if it continues to manufacture the same product even if there is no continuity in ownership.
•	Continuity of Enterprise or Substantial Continuity Test- The other non-traditional exception that courts have used to impose successor liability on asset purchaser’s is the "Continuity of Enterprise" or "Substantial Continuity" doctrine. It is essentially a more relaxed version of the  "mere continuation" exception.  However, instead of focusing on the corporate entity, the Continuity of Enterprise exception analyzes whether the business operation has continued.  Under this theory, a successor corporation may be found liable if it continues the same business or manufacturing operation as it predecessor even if there is no continuity of ownership. Courts will examine the following factors to determine if a successor corporation should be held liable:
•	retention of the same employees;
•	retention of the same supervisory personnel;
•	retention of the same production facilities in the same location;
•	production of the same product;
•	retention of the same name;
•	continuity of assets;
•	continuity of general business operations; and
•	does successor hold itself out as a continuation of the previous enterprise.

	4. Liability of Parent Corporations- A basic tenet of traditional corporate law is that a corporation is a separate entity from its shareholders who are shrouded under a corporate veil from the liabilities of the corporate enterprise. Under this concept of limited shareholder's liability, the shareholder's responsibility for the debts or obligations of a corporation is limited to the amount of the investment in the corporation. In the traditional state corporate veil piercing analysis, courts are extremely reluctant to disregard the corporate form but will use the equitable doctrine of "piercing this corporate veil" to hold either corporate shareholders or specific individuals liable for corporate actions. A court will pierce the corporate veil when (1) the court determines that the shareholder and the corporate entity are not distinct entities and (2) when upholding the corporate form will cause injustice. Some states, like New York, impose a more stringent test for the second element and require fraud before the corporate form may be disregarded. 
The essence of the first part of the test is that the shareholder is using the corporation to further its own purposes. This may be established by showing that the corporation was controlled by an alter ego who completely dominated the policy and business practices of the corporation so that it had no separate will, mind, or existence of its own. The second element for piercing the corporate veil, which requires injustice or fraud to justify disregarding the corporate form, can be satisfied when there is inadequate capitalization for the debts normally associated with business or where the corporate form has been used to misrepresent or defraud creditors. 
	In considering whether to disregard the corporate form, a court will examine the following:
•	Inadequate capitalization in light of the purpose of the subsidiary;

•	Extensive or pervasive control by the parent shareholders;

•	Intermingling of the subsidiary properties or accounts with the parent such as parent pays the salaries and expenses of the subsidiary or all business of the subsidiary is funneled through the parent;

•	Subsidiary fails to observe corporate formalities and separateness such as keeping separate books and records, and holding shareholder or director meetings;

•	Siphoning of subsidiary funds;

•	The companies share common shareholders, directors, and officers;

•	The companies have common business departments;

•	The daily operations of the two companies are not kept separate;

•	The companies file consolidated financial statements and tax returns; and

•	Non-functioning officers or directors.

A number of courts have held parent corporations liable under CERCLA for the hazardous waste activities of their subsidiaries under either an “owner” or “operator” theory. Under the "owner" liability theory, courts focus on the relationship of the parent corporation to its subsidiary. These  cases tend to use a traditional corporate veil piercing analysis to determine if CERCLA liability should be imposed on parent corporations. 
Under the “operator” liability cases, courts will bypass the corporate veil piercing analysis and assess if a parent corporation was pervasively involved in the operations of a particular facility owned by a subsidiary.  With limited exceptions, these cases require active involvement by the parent corporation and not merely ownership or ability to control that is necessarily inherent with ownership. Thus, in most of the jurisdictions adopting the operator theory of liability, unexercised power to control will not be sufficient to impose operator liability on a parent corporation.
In United States vs. Best Foods, 118 S. Ct. 1876 (1998) the United States Supreme Court ruled that a parent corporation may not be liable as an operator for the environmental liabilities of its subsidiary based on its relationship with the subsidiary if such relationship would not warrant piercing the corporate veil. Instead, the court said that the key the question is not whether a parent operates the subsidiary but whether the parent operates the facility. If the parent corporation exercises actual control over the facility, then it may be liable as an operator. However, as in this case,  the mere fact that the parent had placed its own key officials on the subsidiary’s board of directors, that parent officers’ occupied the president and chief executive positions and that these officials exercised day-to-day management of the facility would not expose the parent to operator liability. The court noted that there was a well-established principle of corporate law that directors and officers holding dual positions with a parent and subsidiary can and do “change hats” and that courts presume that directors are wearing their “subsidiary hats” and not their “parent hats” when acting on behalf of the subsidiary. It is up to the government, the court went on, to rebut this presumption and establish that a particular officer may have been acting as an agent of the parent and not the subsidiary. 
However, because there was some evidence that the parent’s environmental and regulatory affairs director may have exerted control over the environmental operations of the subsidiary’s plant, the court remanded the case to the district court with instructions to evaluate the role of the parent’s environmental officer and any of the parent’s other employees who might be said to have played a role in operating the subsidiary’s facility.

	5. State Superfund Statutes- Many states have enacted their own versions of CERCLA. Most of these so-called mini-Superfunds follow the liability scheme of CERCLA. However, some of these states define PRPs differently while other states impose proportional instead of joint liability on PRPs. In addition, many of these state Superfund laws have innocent purchasers defenses which specify the kind of due diligence that a prospective purchaser must undertake in order to qualify for the defense. Thus, purchasers must examine the elements of these defenses in the states where their facilities to be acquired are located. 
	6. State Transfer Statutes- A number of states have enacted statutes that require sellers of industrial establishments to conduct investigations and site cleanups when transferring or closing a plant. These statutes can not only delay a transaction but often result in the discovery of previously unknown contamination and can bring facilities under greater governmental scrutiny. 
II. PRE-ACQUISITION BASELINE ENVIRONMENTAL ASSESSMENTS

	Purchasers should conduct pre-closing environmental due diligence for defensive as well as pro-active reasons. 
•	Environmental due diligence will be necessary if a purchaser hopes to be able to assert an innocent purchaser’s defense for contamination it did not cause. A purchaser can use the information to “draw a while line” around the facility to show what conditions existed prior to the closing. In this way, the purchaser could not only demonstrate in any future litigation what contamination it knew about but also what contamination was not attributable to its operations.      
•	The information can be useful to help a purchaser maintain its third party defense. The purchaser will find out what contamination exists at the property and will be able to implement practices to make sure that it exercises due care regarding the contaminants.
•	Facilities that have been in existence for a long time have probably significantly changed their environmental practices. Areas of a facility that may not appear to pose any current environmental risk may have been used in the past as lagoons, landfills or disposal areas. If there are areas at a site where hazardous materials were handled or disposed, RCRA corrective action may be required in the future. Thus, it is important for the purchaser to review historical photographs of a facility, examine old records and try to interview former employees who may have knowledge about past practices.
•	The environmental practices of the seller may differ from those of the purchaser. Pre-acquisition due diligence will help the purchaser identify the probable environmental costs of these changes and plan operational changes that may be necessary. If the business was operated in violation of environmental laws and those violations continue to take place after the purchaser takes over the business, the purchaser may become liable for those violations that take place after the closing. 
•	A purchaser will evaluate the various facilities to be acquired in an effort to understand how the new business will fit into its current structure. The purchaser may find itself with excess production capacity and obsolete plants and will have to develop a plan for streamlining or restructuring operations and closing obsolete plants. Comprehensive pre-acquisition environmental due diligence will help the purchaser understand the environmental implications of these choices and help it avoid or minimize unnecessary environmental costs.
•	In addition, the EPA and nearly two dozen states have implemented self-reporting auditing policies where companies that voluntarily disclose violations discovered during due diligence or an audit can obtain significant reductions in penalties. Moreover, many states provide that these violations will not be discoverable in civil proceedings. If a purchaser uncovers violations during its due diligence, it may be able to take advantage of these policies. However, if the EPA or state agencies perform a site inspection after the purchaser takes control of the business and then discover violations, the purchaser of the business will no longer be able to take advantage of the penalty reduction aspects of these auditing policies.
•	Pre-acquisition environmental due diligence can help the purchaser negotiate and allocate the environmental liabilities associated with the transaction.
	
III. ALLOCATING ENVIRONMENTAL LIABILITIES IN CONTRACTS-
CERCLA does have some limitations on the freedom parties to a transaction may have to allocate their liability. Most courts now reject "as is" clauses or the doctrine of caveat emptor as a defense to CERCLA liability. These cases hold that the "as is" clause simply bars a breach of warranty action. However, the existence of the breach of warranty may be an equitable consideration in the allocation of response costs in a contribution action. In addition, the majority rule is that while contracting parties can allocate liability among themselves, contractual indemnifications or releases cannot be used as a defense to liability in a government cost recovery action. 
When contracting parties try to allocate liabilities in a contract, the language that is used is often ambiguous and may conflict with other sections of the contract. Such unclear language not only can lead to confusion between the contracting parties but if a dispute ends up in court, the parties will be placed in a position of having a judge try to guess how the parties intended to allocate certain environmental liabilities. This section will discuss the environmental issues that must be addressed in contracts and how parties may clearly resolve those issues.
A. ENVIRONMENTAL DEFINITIONS-  One of the best ways to reduce ambiguities in contracts and reduce the possibility of litigation arising out of confusion or misunderstandings from unclear language is to draft careful definitions. By using definitions, parties can avoid excessive verbiage in the rest of the contract.  Following are recommended defined terms that should be used to help allocate environmental liabilities.
•	Environmental Claims- This term should encompass administrative and litigation proceedings, notices of violations, administrative orders and other written communications involving the government and private parties. 
•	Environmental Conditions- This term will address the kinds of environmental conditions that the parties are intending to allocate and which will trigger the obligations under the contract. For example, will the mere presence of contaminants be sufficient or must there be a release of hazardous substances exceeding a reportable quantity? Must the contaminants be in excess of state or federal cleanup levels? Are the environmental conditions limited to a particular site or does the term encompass properties no longer owned or operated by the seller or disposal sites that may have received wastes generated by the business? 
One way to address these issues to use the environmental issues identified in the pre-acquisition due diligence as the environmental baseline of existing environmental conditions. To use this approach, a purchaser will have to be extremely confident in the thoroughness of its environmental due diligence. However, because of cost and time concerns, it is not possible to sample every possible area of concern at large chemical plants for all possible contaminants that might exist at a site. Generally, the sampling will be targeted at areas where there is visual or historical information indicating that there is a possibility of contamination. There may have been former disposal areas that are no longer obvious because they may now be covered by a parking lot or building. Thus, purchasers should be cautious before using the  results of assessments to define the environmental conditions. The parties can consider using a set of presumptions that certain kinds of contamination found in certain areas or associated with certain processes will be presumed to have been caused by the seller.
•	Environmental Laws- The key issue here is the definition should include laws that do not normally deal with the environment such as OSHA and other worker health or safety requirements. These safety laws may address indoor environmental issues that may not be covered by traditional environmental laws such as indoor air pollution. In addition, the buyer will want to extend the definition to laws that are enacted after the closing but which may apply retroactively. The seller will naturally want to limit the definition to those legal requirements in effect at the time of the closing.
•	Environmental Liabilities- The parties need to identify the specific categories of liabilities that will be allocated by the contracts such as investigation and cleanup costs, fees of engineers and lawyers as well as fines and penalties. The buyer may also want to have extend the term to personal injury and property damage claims of third parties. Because indemnification clauses will not be construed to apply to damages arising out of strict liability unless expressly stated, the buyer will want to make sure that the recitation of the various kinds of liabilities includes a reference to “strict liability” or some other CERCLA-like language.   
•	Environmental Liens- It should be clear that this term is limited to liens filed by a government authority to recover the remedial and investigatory costs incurred by the governmental agency.
•	Hazardous Materials- Because CERCLA does not apply to petroleum contamination, buyers will want this definition to specifically refer to petroleum and not just CERCLA hazardous substances. In addition, some waste streams that have been excluded from the definition of hazardous wastes can still result in liability if those wastes were sent to a landfill that has contaminated the local soil or groundwater. Thus, buyers will also want the definition of hazardous materials to incorporate solid waste or special wastes.
B. REPRESENTATIONS AND WARRANTIES-  A representation is a statement of fact to induce another party to enter into a contract. A warranty is a promise that the statement is true. It is intended to allow the promisee from having to determine if the facts are true.
It is important for buyers to note that a representation or warranty is not a substitute for an indemnity or a specific liability allocation provision. On the other hand, the existence of an “as is” clause in lieu of representations and warranties will only insulate a seller from a breach of warranty claim and will not protect the seller from a CERCLA claim by a buyer or other party.
 		Representations and warranties can be used to help identify and quantify the environmental liabilities, allocate risks or adjust the purchase price. The representations and warranties can help the seller organize its disclosures and records and help the buyer focus its due diligence. The representations and warranties can also help a buyer get a feel for attitude of management towards environmental issues. If the approach of the seller’s management is “don’t ask us, we want don’t tell you, or kill the messenger”, the buyer must be prepared to carefully assess the environmental issues associated with the business. Likewise, if management seems to have been careless or negligent regarding environmental compliance, the buyer should be prepared to perform an environmental compliance-style audit in addition to the traditional environmental due diligence investigation that focuses on liability issues. On the other hand, if management has taken a cautious and forward looking approach, the buyer can gain some assurances from the representations and warranties.
		Some buyers choose to limit their due diligence based on the scope of the representations provided in a contract on the grounds that if the representation is untrue, the purchaser can bring a breach of warranty claim. However, the problem with a breach of warranty claim is that the statute of limitations for claim begins when the statement is untrue . If a purchaser does not discover that the representation was untrue until after the statute of limitation expires, the purchaser will not be able to recover its damages. Thus, relying on representations in lieu of due diligence is not advisable especially where the properties have been operated by a number of entities over the years so that there may not be sufficient information especially about historical liabilities. In addition, purchasers who simply rely on representations and warranties will not be able to assert the CERCLA innocent purchaser’s defense since reliance on representations is not a substitute for conducting the requisite “appropriate inquiry”. Purchasers cannot rely on investigations done by others even if that investigation was performed diligently. 
		A seller will want to qualify or limit the scope of its representations while a buyer will want the broadest representation possible. The final document will usually end up somewhere in between those two extremes depending on the bargaining powers of the parties and the particular facts of the transaction. 
		For example, sellers will often insist that the representations be qualified by “knowledge”. It is not unusual to qualify representations regarding claims filed against third parties or sites no longer owned by a seller but buyer’s will sometimes accept knowledge qualifiers for all  representations. Even when a buyer makes such a concession, the parties must then determine whose knowledge will be imputed to the seller. Will the seller be bound by the knowledge of low-level employees or must a corporate officer have knowledge? In addition, the seller will want to be able to disclose exceptions to the representations on a schedule. The buyer needs to make sure that the scheduled exceptions are not material liabilities that eviscerate the representation.
	Regardless of the how broadly worded the representations are, they should cover the following topics:
•	The business or assets being sold or transferred are in compliance with laws- The seller will not want to make an absolute representation that the business is in complete compliance with law but that there are no material violations. If the buyer agrees to a materiality standard, the parties must still determine how much liability will be deemed to be material. The buyer should remember that in some states plant closings may trigger requirements that are not yet in effect. Thus, the buyer needs to consider its business plans and the environmental laws in the states where plants are located before it feels comfortable relying on this representation. If a plant closing will trigger an environmental cleanup, the buyer should carefully assess the environmental liabilities associated with that plant and try to allocate those liabilities to the seller elsewhere in the contract.  
•	The business has obtained all permits required to operate the business and they are in full force and effect- Since this representation involves the operations of the seller, it should not be limited to knowledge. When considering this representation, the buyer needs to think about issues that may not be important now but may become compliance issues in future. The buyer also needs to take into account its business plans for a particular plant. A representation that the plant has obtained all of the required permits may not be sufficient if the buyer plans to make substantial modifications that will require new permits and/or additional controls. 
•	There have not been any releases of hazardous materials at currently or formerly owned or operated property- This representation is designed to determine if there is any CERCLA owner or operator contamination. Sellers will often insist on knowledge qualifiers for properties no longer owned or operated, and may also want to limit this representation to releases that are “reportable” or that subject the business to material liability. This provision must be carefully drafted. For example, the mere presence of contamination may not be a breach if  it was conditioned on violations of laws. It is also important to specify the business, assets and lands that are to covered by the representation and warranty. The buyer will often want to include properties owned or operated by predecessors in interest so that potential successor liability is also covered. 
•	There have not been any releases at disposal sites used by current company or predecessors- This representation addresses CERCLA generator liability. The buyer will want to make sure that the representation includes wastes that were sent to disposal sites by divisions and business units that are no longer part of the existing business as well as predecessors in interest. Sellers often try to limit the length of time of this representation and insist that knowledge or notice be a condition of the representation. For example, the seller may be willing to say that to the best of its knowledge, it has not received any notice of any releases at any disposal sites used by the business during the past five years. Because most companies do not have waste disposal records that pre-date CERCLA, buyers need to exercise extreme caution before agreeing to limit the time period for this representation.
•	No environmental claims have been asserted against the business or any disposal site used by the business- This representation addresses liabilities directly associated with the business being conveyed as well as potential generator liability for disposal locations. The seller will want to add a knowledge qualifier for environmental claims not yet asserted and for those related to the generator liability. In addition, sellers often also want a materiality qualifier. Buyers should try to have this representation extended to prior divisions, business units that have been sold or shutdown and corporate predecessors. 
•	No Environmental Liens- Some states have enacted Superlien laws that allow governments to attach liens on contaminated property or the assets of a business in a state to secure payment of cleanup costs incurred by a state. Since this can cloud title and complicate financing, sellers should represent that there are no environmental liens. Like other representations, the seller will often want to condition this representation on knowledge or lack of notice of such a lien.  
•	Accuracy of Documents- As part of the due diligence process, a seller will provide a buyer with relevant environmental documentation. These documents help the buyer assess the environmental conditions of the business and assist in the development of its due diligence program. A buyer will often ask that the seller represent that it has provided all documentation relating to environmental matters. A seller will often want to limit this representation to documents that it has knowledge of and that are in its possession. Sometimes, the parties actually list in a schedule all of the documents that have been furnished to the buyer.  	
C. Pre-Closing Covenants-  A covenant is a promise by a party to take perform certain tasks or refrain from taking certain actions. Agreements will often require the seller to correct environmental problems uncovered during the due diligence period, obtain No Further Action Letters or other government approvals, close inactive tanks,  obtain an approved remediation plan or perhaps even complete a remediation prior to closing. If the remediation will require the establishment of engineering or institutional controls that restrict the use of the property, a seller may require the buyer to covenant that it will maintain those controls and comply with any associated use restrictions.     
D. Indemnities -  An indemnity is a full and complete shifting of liability to another party. A party may be entitled under common law to indemnify when it incurs the obligations of another or may contractually agree or obtain a right to indemnification. When an on-going  business is being sold, the purchaser will often request that the seller indemnify the buyer for all environmental liabilities that existed prior to the closing even where a claim may be asserted against the buyer after the closing. A seller, on the other hand, will prefer to sell assets on an “as is “ basis although as explained earlier, an “as is” transaction does not necessarily relieve a seller of CERCLA liability.  Environmental indemnities can provide protection to a buyer in the event that a breach of warranty claim is precluded because of an expired statute of limitations. An environmental indemnity is usually one of the most heavily negotiated aspects of a corporate transaction and the final form of the indemnity will usually lie between the two aforementioned polar extremes. 
A particularly vexing problem can arise when an older plant has had several different owners who may have contributed to historical contamination at the site. A seller may be willing to indemnify a purchaser for contamination caused by its operations but will be reluctant to provide an indemnity for historical contamination caused by previous owners or operators. This negotiation can be exacerbated when the seller did not obtain an environmental indemnity when it acquired the plant. The seller’s argument will be that both the seller and the purchaser are not responsible for the contamination so the seller should not have to absorb all of the liability for contamination it did not cause. Of course, the purchaser’s perspective will be that the seller as the current owner is responsible under CERCLA for all contamination associated with the site.    
	One of the first items that a purchaser should look for when negotiating an indemnity is to determine if there are pre-existing indemnity agreements affecting the assets it is buying. Did the seller agree to assume certain liabilities when it acquired the business it is now selling or were the environmental liabilities retained by the original seller? Some chemical companies have gone through a number of corporate transactions and restructurings over the years. A business may have been sold and become a subsidiary of one company. Some of the product lines of the business may have been discontinued and then it may have been sold again and made into a division of another corporation before being spun out into an independent entity once again. Trying to track the flow of liabilities in such convoluted transactions can be an arduous process. Further complicating this process is that most contracts did not begin to address CERCLA liability until the mid-1980s and earlier contracts may not have even had any specific references to environmental liabilities. Nevertheless, many courts have held that if an indemnification provision of a pre-CERCLA contract has sweeping language such as “any and all liabilities”, it may be sufficiently broad in scope to encompass CERCLA liability.
1. Scope of the Indemnity- In drafting an environmental indemnity, it is important to use precise and specific language to describe the environmental liabilities that are being allocated. A clause referring to “Environmental conditions associated with business” is not as effective as a clause which references the contamination identified in the due diligence reports. It is also important that the language of an environmental indemnity be consistent with language used in the general indemnity contained elsewhere in the contract. For example, if the general indemnity states that the seller will indemnify the buyer for liabilities not expressly assumed but the  environmental indemnity states that seller only agrees to indemnify buyer for those conditions set forth in due diligence reports, this could create an ambiguity that may force the parties into court.
	Some environmental indemnities are linked to a breach of the environmental representations and warranties. From the purchaser’s perspective, it is better to have a stand-alone environmental indemnity which states that specific conditions that the seller must indemnity the buyer. These conditions can include violations of law, releases of hazardous substances occurring prior to the closing at the properties being transferred as well liability for the cleanup of contamination at sites that received hazardous wastes generated by the company prior to the closing. Purchasers may also want that indemnity to apply to environmental conditions that are unknown at the time of the closing although the seller will want to limit the scope of its indemnity to the environmental issues discovered during the due diligence period. A purchaser may be willing to limit the indemnity in this manner if it is reasonably comfortable with the extent of its due diligence. Another vexing issue will be liability for personal injury and property damage suffered by persons living or working on neighboring properties as a result of contaminants migrating from the manufacturing plants. Since the purchaser will likely be continuing to operate these plants, the sellers will be reluctant to provide an indemnity for such claims that are asserted after the closing. Another issue that may will need to be addressed will be changes in laws or cleanup standards that require a pre-closing condition that does not presently require corrective to be remediation after the closing. 	
2. Indemnity Triggers- Once the parties decide on what conditions are to be covered by the indemnity, the next issue to be resolved is what events must take place to trigger the indemnity obligation. Sometimes the condition is simply the discovering of contamination but in this era of risk-based cleanups where states are allowing higher residual contamination to be left in place, a seller may feel that this trigger is too broad. Instead, a seller may prefer that the indemnity be triggered by an action required by law such as the purchaser receiving a order or demand letter from a government agency or third party. For example, if a purchaser decides to expand a plant and uncovers contaminated soil that must be excavated to install footings for a new building,  the seller will want to make sure that such costs related to the construction project are not included in the indemnity. 
	Another difficult issue is if the purchaser decides to perform a cleanup under a state voluntary cleanup program. Since the purchaser was not required to perform the cleanup but decided for business or corporate purposes to undertake the cleanup, a seller will argue that such costs should not be covered by the indemnity since they were not required by law. Moreover, the voluntary nature of the cleanup may preclude insurance coverage for those costs.  
3. Notice Requirements- There are often times other conditions that must be satisfied before the buyer can make a claim under the indemnity. Sometimes, the buyer is required to file a claim within a certain period of time or it will forfeit its right to seek indemnity. It may also have to provide the sellers with copies of reports on a periodic basis and furnish copies of any correspondence or reports filed or received from regulators. Failure to comply with these provisions will often result in the forfeiture of the indemnity claims. 
4. Appropriate Cleanups-Even after a trigger occurs, the seller will want to make sure that the purchaser is undertaking a rationale cleanup and not using the indemnity to modernize its plant. The parties should establish a mechanism for determining the appropriate cleanup levels and criteria used to develop those standards. For example, the buyer may be required to use the most cost-effective remedy that would have to be developed after investigating certain mandated exposure pathways. The parties also need to specify if engineering or institutional controls must be considered in developing a cleanup standard.
5. Cost-Sharing Arrangements- To make sure that both parties have an incentive to control the costs of a cleanup, most indemnifications have some sort of cost-sharing approach. The are many kinds of  formulas that can be used. Some examples are indemnities with deductibles of certain amounts, limiting the indemnity to historical contamination from a certain time period especially where a site may have had a series of owners, responses costs exceeding certain floor or deductible, response costs below a certain cap, a floor and cap with both parties sharing equally thereafter , and sliding scale arrangements.
	Approximately 20 states have now established funding mechanisms to pay for certain kinds of contaminated sites. In addition, some states have established trust funds that pay for the cleanup of contamination caused by underground storage tanks. Some indemnity agreements require the buyer to try to tap these government funding sources before making a claim under the indemnity. Others require the buyer to assign their rights to seek reimbursement from these funds to the seller in the event the seller performs a remediation pursuant to an indemnity claim.
6. Funding the Indemnity- When the seller is conveying all or substantially all of its assets, a purchaser will want to “collateralize” the seller’s promise to pay. Common mechanisms that can be used to provide a buyer with some assurances that the seller will be able to fulfill its indemnity obligations include holdbacks or deferred payments of the purchase price , establishment of an escrow account from the proceeds of the sale, a Letter of Credit, and a bond. There are also some new insurance products that can help reduce the environmental risks of the parties. These policies can cover cleanup costs that exceed estimates for previously known contamination, regulatory reopeners where a government agency requires additional cleanup after the cleanup has been approved and completed, discovery of  new contamination, third party bodily injury and property damage due to off-site migration of contaminants and new releases of contamination from current operations.
7. Termination of Indemnity-  An indemnity may terminate on its own terms after an agreed upon period of time or upon the receipt of a governmental signoff when the indemnity is primarily directed to a limited number of identified environmental conditions. The length of the indemnity will vary depending on the kinds of environmental conditions and the bargaining power of the parties. While there is no  customary period for environmental indemnities, it is not unusual to see indemnities of three to five years in length. It should be noted that some courts hold that an indemnity with no survival is limited to statute of  limitations established for contracts in a particular state or for reasonable period of time. 
8. Exclusive Remedy-  Many state and federal environmental laws contain statutory rights of contribution or cost recovery. In addition, the common law of many states can be used to recover cleanup costs and other environmental liabilities that may be incurred. As a result, it is increasingly common for sellers to insert in the indemnification that it is the sole and exclusive remedy of the buyer and that the buyer waives any other rights it may have to recover its environmental liabilities. This will prevent the buyer from recovering damages that are not covered by the indemnity such as non-qualified costs and deductibles. 
IV. ASSUMPTION OF RISK AND RELEASES- Because of the recent changes in accounting rules and increased SEC interest in environmental disclosure, sellers are becoming increasingly reluctant to give broad indemnities since the liabilities associated with these indemnities must be reported on a seller’s financial statements. With the availability of new insurance products that can provide coverage for existing and unknown environmental conditions, purchasers are more willing to assume the risks associated with some transactions in exchange for a reduced purchaser price. 
	Sometimes the assumption agreements will be limited to known conditions but other times they may extend to unknown environmental conditions as well. The purchasers may release the seller from future liability or may assume responsibility for performing the environmental work that has to be done. Sellers may want an indemnity from the purchaser since a release from a purchaser may not be binding on third parties.
	
IV. REMEDIATION AGREEMENTS- Sometimes, parties use a separate remediation agreement in addition to or in lieu of an indemnification. In these agreements, one party commits to performing remediation after the closing . The remediation may be funded out of the proceeds of the transaction, insurance or state cleanup funds. 
	One of the key issues in these agreements is who maintains controls over the remediation. The seller will be concerned about the buyer performing excessive cleanup (removing soils below regulatory levels)  may fear that the Buyer will exacerbate conditions which could enlarge the seller’s liability. The buyer may also be concerned that the seller will not perform  a sufficiently comprehensive cleanup. If the buyer will be doing the cleanup using escrow funds, the parties will need to create a mechanism to make sure not that the funds are not being improperly used. It would be advisable to build in a dispute resolution mechanism to resolve disagreements over the sufficiency of the cleanup and its costs.
The buyer may also want to specify the cleanup level but this can be difficult in today’s era of risk-based cleanup alternatives. It is better to describe exactly the kind of cleanup to be conducted and what is allowable (deed restrictions, institutional controls, residential vs. institutional cleanup standards).
	Before a cleanup plan is proposed, it is important for the parties to understand buyer’s plans for a facility. For example, if the buyer will be demolishing, expanding or building new structures, it may be advisable to locate the building in less contaminated areas and use a parking lot as a cap for the more heavily contaminated areas.
	If institutional or engineering controls will be used as part of the remedy, it is important that these controls do not interfere with the buyer’s construction or expansion plans. For example, the buyer may want to expand or modify a building but may be prohibited from digging up soil or laying new utility lines. The parties also need to reach an understanding on who will be responsible for maintaining the controls. In some states, purchasers who qualify for the innocent purchaser defense can lose their immunity from liability if they fail to maintain existing engineering or institutional controls. Thus, purchasers need to carefully review their plans for a facility to make sure the controls will not be disturbed and to establish adequate procedures for monitoring the integrity of those controls. Moreover, purchasers who could assert the CERCLA  third party defense to liability may also forfeit their immunity from liability if they allow controls to fall into disrepair since the purchasers could be deemed to have failed to exercise due care regarding the hazardous substances on the property.
Parties should consider contacting state regulators before entering into a remediation agreement. It may be possible for a purchaser to enter into an order on consent that will set forth the scope of the cleanup that must be performed. In addition, the  consent order could provide for the issuance of a release and covenant not to sue to the parties upon the completion of the required work .
The parties can also try to enter into a brownfield or Voluntary Cleanup Program (“VCP”) agreement. Approximately 40 states have established VCPs.  While the VCPs vary from state-to-state, they generally provide volunteers who agree to remediate contaminated sites with releases from liability, provide for relaxed cleanup standards and streamlined Cleanup Procedures, grant contribution protection to the volunteers and provide for the issuance of  No Further Action (“NFA”) Letters and Covenants Not to Sue (“CNTS”) from the state environmental agency. 
VCP agreements can be used to expedite transactions and provide parties to a transaction with objective standards for allocating environmental liabilities. The parties can agree that the seller’s environmental obligations will be limited to those tasks set forth in a VCP agreement. The remediation obligations at a site can  be governed by the cleanup standards contained in the VCP agreement. Moreover, the parties could also agree to limit the environmental conditions subject to an indemnity to the contamination covered by the VCP agreement. Finally, the VCP can provide the parties with an exit strategy for the cleanup. The indemnity obligations can be terminated upon the receipt of a NFA and CNTS. Sometimes, the VCP agreements can also be used in lieu of indemnity agreements.  
 One drawback of these VCP agreements is that while the cleanups may be able to progress at a faster pace, they may not comply with the requirements of the federal National Contingency Plan (“NCP”) which is the blueprint that site investigations and cleanup must follow under CERCLA. Parties that do not comply with the NCP will not be able to recover their cleanup costs from other PRPs. As a result, some VCP participants will still perform NCP-quality cleanups to preserve their rights to recover their costs. For more information on brownfields and VCPs, readers should refer to sections 8.22 and 8.23
V.  Environmental Insurance Products- Another tool that may be useful for allocating environmental liability is using one of the new environmental insurance products that have been developed over the past few years to help shift the liability associated with brownfield and real estate redevelopment. At the time of this writing, there are five insurers that are offering environmental insurance products that may be useful in corporate transactions. The five insurers are: AIG, Zurich, United Capital, Kemper and Reliance. 
Another incentive for the development of these insurance products has been the tightening of disclosure requirements for environmental liabilities by the SEC. Since these indemnities must be reflected in their financial statements, many sellers are becoming increasingly reluctant to indemnify buyers and would prefer to shift the risk to insurance carriers.
Environmental impairment liability policies first arose in the 1970’s in response to the financial assurance requirements required by environmental statutes such as RCRA. Dozens of insurers who issued CGL policies eagerly entered the market of environmental impairment liability (“EIL”) coverage or pollution legal liability (“PL”). However, by 1985, only a handful of carriers continued to offer EIL policies. The vast majority of EIL policies written during the 1980’s was to provide coverage to environmental contractors, primarily asbestos abatement contractors. 
Insurance  carriers have been aggressively marketing these new insurance products. The policies may be helpful in large, multiple site transactions. However, they may not prove to be economical for smaller sites with moderate contamination. Moreover, many corporate officers who remember how the insurers fiercely contested coverage for CGL policies in the 1980s and 1990s remain highly skeptical about these new policies. 
The old PL contracts usually had one insuring agreement that covered third party bodily injury, property damage and cleanup costs at off-site locations relating to property conditions of a specific site owned or operated by the insured. The new PL policies are multi-part forms which divide the basic elements of the old coverage into different insuring parts as well as additional coverage which will be discussed in more detail below. The purpose of these new PL policies is to fill perceived gaps in the old PL policies and also provide greater flexibility for tailoring the policy to the needs of a specific transaction.    
Following is a summary of the types of insurance products that are available.

A. Site Specific Pollution Liability/Property Transfer Policies- This kind policy was originally designed to cover parties to a real estate transaction who could qualify for the CERCLA innocent purchaser’s defense and, thus, reduce the risk to the insurer. The idea was that the purchaser or lender performed due diligence and did not discover contamination could get coverage if new contamination was discovered or a third party discovered contamination emanating from the insured location. 
The initial policies only addressed cleanup expenses resulting from written claims made by the government or third parties. Voluntary cleanups by the insured and bodily injury or property damage were not covered. In addition, because these were  indemnification policies, the insured would have to incur the costs and seek reimbursement from the insurer. 
The newer policies are capable of covering a broader array damages depending on policy combinations or menus that are selected and depending on the insurance carrier. Coverage is now available for future cleanup costs at the property of the insured as well as for off-site contamination.. The coverage for cleanup costs can also extend to pre-existing contamination that is unknown or that is known and disclosed in the application. Some policies allow coverage for voluntary or risk-based cleanups while others still require that the cleanup be mandated by the government. Additional endorsements can be obtained for different types of losses such as business interruption, natural resources damages, costs of delayed construction, contractual liability and non-owned disposal sites where an insured could have potential liability as a generator. 
The policies may also provide coverage for bodily injury and property damage for on-site and off-site conditions. Some policies may underwrite third party diminution in value provided that contamination from the insured property actually migrates to the third party property. While the policies purport to provide coverage for diminution in property value of the insured, coverage will not be available if contamination has not reached the property. Thus, the policies will not provide coverage for stigma claims for property located near a contaminated site. This type of damage is viewed as a business risk that must be assumed by the insured. 
The trigger for coverage will vary depending on the type of coverage and the insurer. Under the old PL policies, the trigger was usually what is called a “double trigger” where the damage had to be discovered and reported during the policy period. Now, some policies provide that for cleanup costs the coverage will be triggered upon the discovery, notice or incurrence of the cleanup costs. However, there is usually still a double trigger for bodily injury and property damage claims. Some insurers allow the insured to purchase an extended reporting period feature which becomes effective at the end of the policy for environmental incidents that may have occurred during the policy. In essence, this transforms the policy into a limited occurrence policy and there may be a trend towards occurrence policies in the future. This development is extremely important for “deep-pocket” parties are involved in a transaction or when the contaminated property will be developed for residential property. Corporate sellers who have been hesitant to divest themselves of excess industrial properties need to be certain that they are eliminating potential future environmental liability and a limited term PL policy will not assuage those concerns. 
All of the policies have a duty to defend which is subject to the policy limits. What this provision means is that each dollar of that is expended on legal fees reduces the amount of coverage available to pay for a cleanup or other damages. Some policies allow the insured to select their own counsel under certain circumstances. The costs and scope of these policies can vary. The usual terms for the policies are five or ten years but some policies have been issued with terms of up to 30 years.
B. Stop loss, Cleanup Cost or Remediation Cost Overrun Policy- This is a new kind of policy which addresses known contamination for which a claim has been made and remediation is required. Unlike the PL policy which provides liability protection, this type of policy provide coverage against cost overruns for site cleanups. This policy is underwritten based on an approved remediation plan and a cost estimate developed from a scope of work. Lenders and the seller can be named as an additional insured under the policy.
Generally, the premiums for these policies can run from 5%- 10% of the expected remediation costs with a deductible of the estimated cleanup costs plus an additional 10%-20% self-insured retention (“SIR”). For example, a $1 million policy may have an SIR of $100,000. Thus, coverage would not begin until $1.1 million has been incurred by the insured. Policy limits that are available can range up to $100 million for primary coverage and up to $200 with reinsurance.
Insurers view this coverage as more risky and is getting increasingly expensive and difficult to negotiate. This coverage can be time-consuming because insurers may also have to perform costly investigations upfront or review remediation plans submitted by the insured. If the insurer is familiar with the environmental consulting firm, this can expedite the review period. 
The cleanup costs must be incurred pursuant to a remedial action plan for a specified location. No coverage is available for unidentified or unknown off-site disposal sites. Usually, the cleanup costs must be incurred during the policy period but some policies are unclear if the costs must actually be paid or if a claim for those costs simply has to be made during the policy period. 
It is important that the policy language be carefully reviewed to determine what costs are eligible and how coverage is triggered. For example, pre-cleanup investigatory costs and post-cleanup operation and monitoring expenses may not covered. Cleanup costs for unknown contamination is covered or increased concentrations of known contaminants may be covered as well as costs associated with changes in cleanup standards. However, modifications to cleanup plans must usually be approved by the insurer. Like the PL policy, there are a long list of exclusions
C. Negotiating Environmental Insurance Policies
It is important to keep in mind that the standard off-the-shelf forms developed by the carriers often do not reflect the final policies that are issued. Because each deal has different environmental issues and the complexity of environmental issues at sites can vary, the policies be tailored to the particular needs of the transaction or parties. The terms of coverage and the language of the policy may have to be heavily negotiated either by endorsements or manuscripting of the actual policies. The market for these insurance products is evolving and often requires innovative solutions. As a result, the some of the carriers have exhibited flexibility in negotiating these policies. Thus, there is a real need for attorneys, risk managers, underwriters and brokers who have expertise with these products. Moreover, since these policies are new, there is little claims history or caselaw for understanding the meaning of ambiguous terms. Negotiating clear and precise language at the outset may help insureds avoid having to litigate the availability of coverage in the future. 
There is a downside to heavily negotiating these agreements. State insurance commissioners review policies and those that are “admitted” qualify for state insurance funds in the event the carrier becomes insolvent. In addition, there may be a surcharge or tax levied against a non-admitted policy. Heavily manuscripting a policy may result in it being “non-admitted. If the policy is revised by endorsement, the insured should ask that the insurer to take the steps necessary to have the endorsement “admitted.”   
The response of an insurance carrier to a request for environmental insurance can be used as another independent means of due diligence tool for ferreting out unknown environmental conditions. If a particular coverage is declined, this may mean that the risks posed by the site may not be fully understood. 
Following are some of the issues that should be considered when reviewing a standard policy.
1. Definitions- The scope of coverage of these policies is governed by the definitions which vary among insurers. These policies used a plethora of definitions which must be carefully reviewed by themselves and how they interact with other terms and conditions of the policy. 
•	Claim- This definition often refers to a written assertion alleging liability or responsibility by the insured which includes but not is limited to lawsuits or petitions filed against the insured. Since it is unclear if this term would apply to government information requests which can be costly to comply, insureds may want to specifically include a reference to information requests. 
•	Contract Damages- This term applies to compensatory damages arising from a written contract that is breached by the insured as a direct result of an environmental condition. It does not cover punitive damages or breach of contract claims for informal arrangements that may not be memorialized in writing. If a company uses such non-written contractual arrangements, the language should be modified. Likewise, the “direct result” language is rather limiting and should be deleted.  
•	Cleanup Costs- This term usually refers to expenses incurred in response to an environment condition pursuant to environmental laws or standards. Make sure that investigation costs are included as well as voluntary cleanups that are not necessarily conducted pursuant to a governmental order. 
•	Environmental Incident- This definition usually includes claims made against the insured during the policy period as a result of a pollution condition or the discovery by the insured of an environmental condition during the policy period. The term “discovered” should be clarified to make sure that environmental conditions actually unknown to the insured at the time of the policy are in fact covered.  
•	Environmental Standards- Make sure the policy covers state or local laws. In addition, some policies include within the definition of standard the ASTM risk-based cleanup approach which often allows a higher level of residual contamination to remain at a site. If this becomes an applicable standard, the policy may not pay for the incremental costs incurred to achieve a more complete cleanup which may be required by the contract particularly if residential properties are near the property. Therefore, insureds may want to consider deleting risk-based cleanups as a standard. 
•	Insured- This term usually includes references to leased workers, temporary workers and employees acting within their scope of employment. An insured may want to modify this language so that it applies to any worker who is injured on the site since this provides broader coverage
•	Legal Defense Expense- Some policies limit legal costs to those that are “reasonably and necessary.” An insured should try to eliminate this restricting language and may want to make sure that expenses related to in-house counsel are included if they are used by the insured.   
•	Property Damage- Often times, the policy will refer to “tangible” property which is somewhat ambiguous. Consider replacing this term with “real and personal property.”
•	Restoration Period- This is usually states as the period of time that begins after the deductible has been reached and ends when the covered locations “ should be” restored to operation with “reasonable speed and quality” or when business activities resume at a new location.  The purpose of this definition is to make sure that the insured acts promptly so that the environmental conditions are not exacerbated. However, the words within the quotations serve to restrict on coverage. Moreover, the insured may feel it needs to move more quickly than would otherwise normally be required because of operational constraints. For example, it may decided to excavate soil rather than try a less expensive passive remediation approach. In such a case, the extra costs may be deemed to not fall within the “reasonable speed and quality” requirement. Therefore, the “should be” language should be modified to “are” and the “reasonable speed and quality” phrase should be deleted or a letter memorializing the need for the particular action should be sent to the insurer and made a part of the policy. 
2. EXCLUSIONS- Many of the exclusions contained in the old PL policies have been eliminated but new exclusions have been added such as lead-based paint an asbestos. Insurers may extend coverage for some of the excluded substances by endorsements.
•	Asbestos- All the policies contain an absolute exclusion for coverage arising out of the existence of asbestos products, fibers or dust. Consider modifying this exclusion by an endorsement to provide limited bodily injury and legal defense coverage. 
•	Divested Property- In many transactions, due diligence does not address facilities that a seller may have sold in the past since they may be unknown or access to them may not be available. As a result, the purchaser of a business may not be aware of environmental issues associated with those former facilities. Thus, this exclusion should be deleted when the transaction involves the sale of a business and not simply a parcel of real property. 
•	Employer Liability- This exclusion operates for injury to any workers when the injury occurs during the course of the workers employment. Consider limiting this exclusion by endorsement so that coverage will be available to the extent the injury is not covered by workers compensation.
•	Fines/Penalties- All the policies exclude coverage for civil, criminal and administrative penalties, punitive damages and some even include costs associated with non-monetary relief. The insured may try to eliminate this exclusion for civil penalties where such insurance is permitted by state law. 
•	Intentional Acts- This exclusion usually applies to fraudulent, dishonest, intentional, willful or deliberate non-compliance with environmental laws, regulations, orders or directives. Sometimes, facility operators must take action to abate or mitigate an immediate hazard that may cause another environmental problem or violate a law such as discharging wastewater from a tank. This exclusion can also be problematic at old industrial facilities which may have been operated by the insured when custom and practice may have been to dispose of waste materials on-site. Thus, definition should be modified to only apply to fraudulent conduct.   
•	Known Conditions- All the policies contain an exclusion for environmental conditions existing at the time of the policy that were reported or known to the officers, directors, partners or other employees responsible for environmental affairs of the insured unless all material facts were disclosed to the insurer prior to the policy. This is one of the most important clauses in the insurance contract because it can seriously limit any recovery by the insured especially in corporate transactions since sellers may not disclose all of the facts they know to the buyer who purchases the insurance. If buyer retains the employees of the seller who were aware of the environmental condition, this definition would impute the knowledge of those employees to the insured/buyer. This exclusion should be modified by endorsement which narrowly defines “known conditions” The endorsement should basically provide that the insurer has the right to review all relevant records and any information contained in those records would be deemed to be “known conditions.”
•	Lead Paint- All policies contain an absolute exclusion for lead-based paint. Consider modifying this exclusion by an endorsement to provide limited bodily injury and legal defense coverage. 
•	Naturally Occurring Radioactive Materials- The old exclusion for radioactive materials has been replaced by this exclusion which seems to be intended to address radon. Consider modifying this exclusion by an endorsement to provide limited bodily injury and legal defense coverage. In addition, if the insured operates a business such as a hospital or pharmaceutical facility, it may be possible to modify this exclusion to reflect the operations of the insured.
•	Non-Owned Disposal Facilities- Most policies contain an exclusion for environmental conditions at off-site disposal facilities that received wastes generated by the insured if those facilities are not listed as a insured location. Since companies often do not have adequate records of disposal facilities used prior to 1980, an insured acquiring an industrial facility or business may want to modify this exclusion.    
•	Property Replacement- This exclusion applies to repair or replacements of personal property, fixtures, structures, buildings or improvements owned, operated or controlled by the insured. This can be a significant exclusion when dealing with brownfield redevelopment since on-site structures may have to be dismantled and the reconstruction costs can be significant. If appropriate, this exclusion should be deleted by endorsement. 
•	Underground Storage Tanks (USTs)- All the policies contain an exclusion for underground storage tanks which is similar to the known conditions exclusion since it applies to existing USTs and associated piping that were known to the officers, directors, partners or other employees responsible for environmental affairs of the insured at the time of the policy. The same issues of imputing of knowledge that was discussed in the “known conditions” exclusion applies here. The exclusion should be limited to those USTs that are listed or scheduled. 
3. CONDITIONS-
•	Notice- Many of the off-the-shelf forms require immediate notice to the insured of an environmental condition or claim while others require notice to be tendered as soon as practicable. In either event, the term should be defined preferably as a period of time following discovery. 
•	Right of Renewal- The insured may want to consider requesting an endorsement providing an automatic right of renewal at a guaranteed rate or an automatic right of reinstatement if the policy limits are reached also at a guaranteed rate.  
•	Action Against the Company- Many policies provide that an action may not be maintained against the insurer unless the insured was in full compliance with the terms of the policy. The insured should try to have this restriction modified to material compliance.
•	Assignment- All policies provide that they cannot be assigned without the consent of the insured. If the insured intends to redevelop a brownfield and transfer ownership or if the policy is taken out by a seller, the insured should consider deleting this provision or having the other party added as an additional insured. If the provision cannot be deleted, then it should be modified so that insurer agrees not to unreasonably withhold its consent. 
•	Choice of Law – All policies have choice of law provisions that select New York which has caselaw favorably to insurers. The insured should consider requesting that the controlling law be the jurisdiction where the property is located or where the principal office of the business is situated. 
•	Other Insurance- Some policies provide that when the insured has other insurance policies, they will be the primary policy and the PL policy will only take effect as excess insurance to the other insurance policies. Since environmental insurance is a niche insurance product, this provision should be amended to provide that the policy is a primary policy so that the insured does not have to pursue payment from other insurance before making a claim against the policy. 
•	Severability- This provision usually provides that the Limits of Liability and any rights assigned to the first named insured apply as if each insured was the only insured and separately to each insured against whom a claim is made or suit brought. This section should be modified so it is clear that when there are multiple insureds, that each insured is not required to pay the  retention for each incident.    
•	Subrogation- Since the purpose of environmental insurance is to enable parties to limit their environmental liability so that transactions can take place, the subrogation clause in favor of the insurer should be deleted. However, this could result in a premium increase of up to 15%.

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