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Need for environmental reviews is stressed.

Need for Environmental Reviews is Stressed The importance of conducting an environmental review before purchasing a site and the rewards of using a three-party approach in the business interruption claims adjusting process were just two of the topics discussed at the RIMS New Jersey Risk Management Day program in Edison, NJ, recently.

With the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and Superfund Amendments and Reauthorization Act (SARA), the guidelines for environmental liability were drastically altered and the criteria for accountability were broadened and left unclear. As a result, companies found that under CERCLA, the potential for incurring environmental liability after purchasing property was left open to the courts to decide on a case-by-case basis. "You should all be concerned with the very real possibility that whenever you purchase a property you run the risk of also purchasing any environmental liability left behind by the previous owner," warned Kenneth S. Kasper, senior counsel for Schering-Plough Corp., as he opened the session "Environmental Issues and Business Transactions."

According to Mr. Kasper, "In a nutshell, what we're talking about here today is environmental due diligence, which means taking prudent measures to evaluate potential environmental risks before you purchase a property. This is especially important with regard to the stringent CERCLA liabilities which deal with abandoned sites that are no longer operating.

"Two important concepts to remeber regarding CERCLA are strictly liability, which means that there are very few defenses available to the current owner or operator, and joint and several liability, which means that an individual with a relatively small share of liability could become responsible for financing the entire cleanup of a site."

Under CERCLA, the current owner and operator of a facility are both liable for any potential cleanup costs. In addition, other person who can be held liable for such cleanup costs include: any past owner or operator who has disposed of hazardous waste at the facility; any person who has arranged for the disposal or treatment of hazardous waste owned or possessed by that person; any person who has arranged with a transporter for the disposal or treatment of hazardous substances owned by that person; and any person who accepted hazardous materials for transport to disposal or treatment facilities or sites selected by that transporter.

Mr. Kasper said there are only three defenses available under CERCLA. The environmental release in question must have occurred solely by an act of God, an act of war, an act or omission of a third party, or any combination of the three. "In order to qualify under the third-party defense," he explained, "you have to prove that you exercised due care with respect to the hazardous substance, and that you took precautions against the foreseeable acts or omissions of any third-party."

Scott Gordon, director of environmental engineering for Schering-Plough, discussed a number of changes that have taken place in the way most businesses go about acquiring properties as a result of the strict liabilities under CERCLA. "The most obvious difference is that CERCLA has required companies to look at many more properties than they once did to find one with little or no liability," he said.

Mr. Gordon then outlined a five-step approach for assessing sites to minimize environmental liability in real estate transactions. The approach includes a preliminary site assessment, a detailed site assessment, negotiating a remediation plan, negotiating who pays for the cleanup, and then going ahead and completing the transaction.

"Let me give you all a word of caution," added Mr. Gordon. "Based on years of experience, I would be wary if the present owner of the property you are interested in buying does not believe there are any environmental problems on the site without having done a thorough site inspection. And I would be extremely wary if the owner has done some testing of the site and still feels that there are no environmental problems. There is a lack of objectivity when the present landowner conducts the site inspection."

During the preliminary site inspection, in addition to simply researching its history through records, maps and topographical drawings, one should try to obtain any aerial photographs taken of the site over several years. "A picture really is worth a thousand words," proclaimed Mr. Gordon. "When someone trained in reading aerial photographs looks at photographs of a particular site, he will see a thousand things that someone with an untrained eye could never have detected even if he had personally inspected the site."

Often performed concurrently with the preliminary inspection, the physical site inspection consists of examining a list of all raw materials used onsite and an inspection of all storage areas and waste storage and handling areas. Above all, a thorough examination of a facilities housekeeping may yield some of the most pertinent information. "Housekeeping can tell you a lot of things about a plant," said Mr. Gordon. "If I were to go into someone's house and look around, even on a superficial level, I could tell a lot about the people who live there. And if I go into a plant, I can tell a lot about the people that work there, the basic organizational philosophy that's used there, and the underlying current that keeps the plant productive and makes it what it has become. For example, examining the structure to determine or high-quality materials, you can get a good idea as to the overall philosophy of the organization. If they skimp on the construction of the facility, you can pretty much bet the house that they skimp on just about everything else."

Throughout his presentation, Mr. Gordon continued to stress the fact that the purchasers of property can never be too thorough in their site inspection procedures. To date, he reminded his audience, the courts have been extremely inconsistent in assessing liability for the cleanup of contaminated sites.

"The bottom line," said Mr. Kasper, "is that no site inspection program can be 100 percent accurate. As a result, any margin for error makes it imperative for companies to prepare for the very real possibility that along with the property they purchase comes some degree of liability."

Business Interruption

One of two afternoon programs, "Business Interruption Claim Adjusting," involved a question-and-answer panel discussion featuring Don Klingel, risk manager for Unilever, Dan Grady, principal of DRG International, Robin Hayward, a general adjuster for General Adjustment Bureau, and Stephen Scammell, director of risk management for GAF Corporation. The focus of the discussion dealt with how a manufacturing operation should handle a business interruption loss, including the roles of the risk manager, the auditor and the adjustor. Appropriate policy provisions relating to the claim process was also addressed.

Mr. Grady opened the program by advising the risk managers that business interruption insurance is not necessarily available for all types of risks. In addition, he said some risks can be covered within one policy, while others must be dealt with separately. "Once these basic rules are recognized, the risk manager may proceed with pursuing business interruption coverage for all appropriate insurable risks," Mr. Grady said.

With regard to working with insurance brokers to purchase business interruption policies, it was the overall consensus of the panel that many brokers do not have the strong background in finance necessary to intelligently assist risk managers.

The relationship between risk managers and insurance company adjusters was also discussed. Based on his experience, Mr. Scammell said that it often appears that the adjusters really represent the interests of the insurers, sometimes at the expense of the insureds. The adjuster's apparent real purpose, he said, is to help disprove, rather than prove, the claim made by the risk manager.

According to Mr. Grady, one of the biggest problems facing adjusters is a lack of information being supplied by the risk manager about his particular company.

"We [the adjusters] don't know your business," Mr. Hayward commented, "until you, the risk manager takes the time to tell us what it is and how it operates. Initially, all we can do is ask questions. The adjuster will have absolutely no idea how a particular business operates until he becomes involved with that business in a loss situation."

"I may be working with a risk manager," added Mr. Hayward, "and we may be getting along well together, or he may not like me. And if he doesn't like me, he may be apt to go out and find himself a public adjuster. The whole point here is really the cooperation that must exist between the risk manager and the adjuster, as well as between the public adjuster and the insurance adjuster."

Most importantly, it is essential for a company to establish some sort of continuity with respect to working with insurance company adjusters and public adjusters. Mr. Hayward said, "The basis of successfully handling accounts is in getting to know who you are dealing with. If you see me every time you have a loss, then you get to know how I work. This kind of familiarity can greatly streamline a company's business interruption claim process."
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Author:Furino, Lou
Publication:Risk Management
Date:Nov 1, 1989
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