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Allocating risk for hazardous waste cleanups.

Despite the strong demand for pollution liability policies, the insurance industry has not been willing to grant significant coverage, imposing instead extremely high premiums and protective terms and conditions " on prospective contractors.

THE YEAR IS 2010. After 10 days of tense deliberation, the jury's verdict is about to be announced. A well-known, highly respected hazardous waste contractor that had used the best technology available 20 years earlier to clean up a highly contaminated waste site is on trial. Now, there are more advanced technologies to clean up such sites, but these did not exist at the time.

The verdict is in. The defendant is found negligent, and the relatives of a woman who died from a rare form of cancer are awarded millions in damages. Like most other contractors, this one was unable to arrange for adequate liability coverage at the time of the cleanup, and the judgment signifies the demise of the company. More importantly, it means that many severely contaminated waste sites probably will not continue to be cleaned up, posing a far greater menace to health and the environment.

This scenario is not so farfetched. Contractors working in today's complex regulatory environment often are faced with astronomically high liability risk for various types of much-needed work. At the forefront is the remediation of hazardous waste sites. They include municipal landfills, industrial lagoons, and recycling facilities, which are characterized by the actual or threatened release of pollutants or contaminants to surface water, the air, or groundwater, as well as by potential direct human contact with the wastes.

A Response Action Contractor (RAC) is the scientist, engineer, or constructor charged with remediating or cleaning up hazardous waste sites. The RAC's role includes determining the nature and extent of the contaminants, risk to people and the environment posed by these substances, and alternatives for remediation. Based on this information, a remedy for the site is selected and the RAC completes the design and remediates the site. The definition of an RAC does not include anyone responsible for placing the waste at the site or anyone who profited from the disposal.

Initial data collected from site investigations are used to perform a risk assessment and then determine alternative solutions. The uncertainties that are likely to exist at the end of this process will be reduced somewhat during the design phase, when more samples are taken and additional treatability studies are conducted to determine cleanup parameters.

Remediation begins once the design is complete. It is complex and involves many factors because most waste is transmitted underground, and the tools currently available to detect contaminants and track their migration are imperfect and costly. In addition, many of the technologies used to treat wastes are unproven and their long-term usefulness is unknown. Uncertainties may include the nature and extent of the contaminants, the underground flow paths, how the contaminants are transmitted through the unsaturated zone or in the groundwater, and the efficacy of treatment technologies.

Site remediation will proceed with or without these answers. At many of the sites, it is possible that the RAC will not locate all the contaminants or specify the correct treatment or contaminant remedy. Given that this uncertainty exists, what then is the RAC's liability?

Hazardous waste laws

Hazardous wastes are covered primarily in two pieces of Federal legislation--the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Many states also have passed laws similar to the Federal rules. These dictate strict, joint, and several liability for those persons responsible for generating or placing wastes at a site. Any one party can be held responsible for the entire cleanup cost at a site, regardless of the extent to which he contributed to the problem or whether or not he was at fault. Similar accountability may exist under the common law theories of ultrahazardous activity, trespass, or nuisance.

None of the existing regulations explicitly apply strict, joint and several liability to RACs. In contrast, CERCLA and a few state laws require that an RAC be found at fault under a negligence standard in order to be held liable. Most states, however, do not have such standards and instead have incorporated wording in their laws that may be applied to RACs. For example, in certain states, parties that have control over a hazardous substance, have contributed to its release, or have arranged for its disposal or treatment can be held to blame.

RACs could fall under these definitions and, therefore, be found strictly liable in many states, despite not being responsible for the original wastes. Even in those that have a negligence standard, RACs find themselves subject to considerable exposure because of the inherent uncertainties in hazardous waste work and the rapidly changing treatment technologies. A jury considering a case 10 or 20 years after site cleanup, when most long-term health effects surface, is not likely to sympathize with the contractor whose remedies failed, particularly if the current technology would solve the problems. Most likely, the jury would find the contactor retroactively negligent.

Traditionally, an engineer or constructor covers his risks on a project through a combination of contractual terms and insurance. Clients contracting in the hazardous waste market initially expect that the same combination of standard terms and conditions and insurance that are used in other fields will suffice. This is not the case.

In the hazardous waste arena, there are problems with this scenario. Strict, joint, and several liability may be imposed on the RAC as previously discussed; RACs can not obtain meaningful insurance to cover their risk of being found negligent; and, as a consequence, can not avoid incurring legal costs even if they ultimately are found to be without fault.

The problem of strict, joint, and several liability being imposed on the RAC usually can be resolved by adding clauses to the contract stating that the client protects the RAC from this liability. By law, the client always will be subject to the strict, joint, and several standard.

The issue of insurance is more complex and troublesome. The fact is that what exists in the marketplace today is inadequate to protect contractors from the potential catastrophic liabilities associated with high-risk hazardous waste work. All standard professional and general liability policies contain a pollution exclusion. Currently, only two companies offer pollution insurance for study and design, and two for construction contracts. The policy amounts are low ($2-10,000,000) compared with the potential personal injury or property damage claims; all coverage is claims-made--i.e., it only covers claims originating during the one-year policy period; and it can be terminated at any time by the insurer. These small amounts of insurance are available only during the period that the cleanup is active. In reality, many long-term health claims can be anticipated years after it is over. Furthermore, the insurance amounts would not cover potential third-party claims, which easily could exceed $100,000,000.

This leaves the RAC in a dilemma when faced with traditional contract terms and conditions. To decide on a course of action, an RAC first evaluates the risk of the type of work, the contaminants, the potential exposure routes to third parties, and the amount of hazardous material left on-site when the project is completed. He then can decide what share of the third-party risk he is willing to assume. A prudent RAC will sign contracts with traditional terms only if the third-party risk is very low. To do otherwise puts his company's future in jeopardy, given the thinly capitalized nature of most engineering and construction firms.

If the RAC decides to accept the job despite significant risk, the only viable alternative is to negotiate a satisfactory risk-sharing arrangement with the client. This normally takes the form of the RAC being responsible for third-party claims up to a set amount, with the client indemnifying the RAC above this ceiling. The latter is negotiated based on the exact size and nature of the project and is in the $100,000-1,000,000 range for most of them.

Contractors refusing to bid

There is an underlying premise among Federal and state agencies that the development of a viable commercial insurance market will be encouraged by the creation of incentives for RACs to seek such insurance. This has not proven valid. Despite the strong demand for pollution liability policies, the insurance industry has not been willing to grant significant coverage, imposing instead extremely high premiums and protective terms and conditions. In the Federal arena, as in many states, the low liability limits of proposed contractor indemnity include multiple deductibles and various restrictive conditions. For example, New Jersey's original indemnification program, now expired, only offered indemnification up to $10,000,000 and penalized contractors who asked for it in the bidding process. As a result, many of the larger and well-capitalized RACs have refrained from bidding in the state and will continue to do so until policy is changed.

Another extremely problematic area is the Environmental Protection Agency's proposed guideline that indemnification only cover the claims arising and reported to the EPA within 10 years of the contract term or, alternatively, completion of work at a site for multi-site contracts. This provision fails to recognize that claims arising out of hazardous waste remediation may be brought decades after a project is completed, usually because of the long latency period of diseases that form the basis of claims.

Inadequacies in contractor indemnification for public arena hazardous waste work are causing severe problems. Large, highly capable companies that have extensive experience in managing and putting together complex projects and developing innovative construction technology with outstanding safety records are reluctant to engage in this task because of the potentially unlimited liability that they might incur. For this reason, many members of the National Constructors Association (encompassing 17 of the nation's largest engineering and construction companies, which employ more than 120,000 people) are not bidding on hazardous waste remediation work.

The small number of NCA companies that are performing such work are doing so on a conservative, selective basis. They conduct detailed pre-bid risk assessments to review available liability protection and eliminate high-risk sites from bidding consideration. No bid is submitted if a site is likely to release hazardous material, is close to populated areas, there is a great deal of highly toxic substances on-site, and the containment of the hazardous material is precarious. A recent survey of the NCA member companies resulted in a list of 32 projects that one or more of the companies declined to bid on, precisely because of the high-risk factors. This did not include projects for which no bids at all were submitted.

What does this all mean? The technical innovation that results from drawing upon the talents of the best firms is limited, because companies that would develop new technologies are staying out of the business. Clients also suffer financially, as decreased competition--i.e., a smaller pool of bidders--translates into higher bids.

In addition, the lack of adequate indemnification is a deterrent to the surety industry, whose bonds will be required under the Miller Act, which specifies requirements for Federal contracts. These bonding companies are becoming reluctant to participate because of concern that the lack of insurance or indemnification for their principals will cause future litigants to attempt to convert the bond into a liability policy. In addition, the lack of adequate insurance or indemnification for one major hazardous waste loss could ruin the financial integrity of a company.

Responsible engineers and constructors know that the hazardous waste cleanup business has inherent uncertainties and unknowns. While they do not ask to be insulated from financial responsibility for negligent actions, they do expect a broad-based indemnification program that offers protection from catastrophic loss. This is vital, especially since that loss may be assessed against a contractor without fault, or be based upon retroactive application of future standards to currently available technologies.
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Title Annotation:pollution liability insurance for hazardous waste cleanup firms
Author:Yates, Michael K.
Publication:USA Today (Magazine)
Date:Jan 1, 1993
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