Hidden Environmental Exposures of the Construction Industry

You Don't Have To Be an Environmental Contractor To Create Environmental Liability

Clinging to the idea that if you don't perform environmental services, you don't have an environmental exposure, many contractors convince themselves that environmental litigation is not a problem. Contrary to that belief, it is—and it's growing. To succeed in today's world, contractors must incorporate environmental risk management into every facet of their business operations. To do otherwise invites disaster.

In the 1990s, courts imposed substantial liability on contractors traditionally not known to have environmental exposures. For example, in Marathon Oil Company v Chicago Bridge and Iron Company, the contractor, Chicago Bridge and Iron Company, was primarily tasked to relocate heavy machinery on a Marathon Oil site in Texas. During the course of the work, a crane lifting a piece of heavy machinery inadvertently dropped its load. As the machinery fell, it hit a pipe leading to an aboveground tank storing hydrofluoric acid. Subsequently, the pipe separated from the tank causing a gap between the tank and the pipe.

The result was devastating. Approximately 6,000 pounds of hydrofluoric acid was released into the atmosphere. Some 3,000 residents were evacuated from the surrounding areas. Despite all efforts to reduce the impact, approximately 1,000 residents were still treated for respiratory injuries. As a result, numerous lawsuits were filed alleging bodily injury and property damage, including loss of use of property and cleanup expense. The court entered judgment holding the contractor 95 percent liable for $23 million. The question may now be: What can we expect in the 2000s?

Reducing the Impact

To further understand the environmental exposure, it is important to realize that pollution incidents are low-frequency, high-severity type events. Because these incidents are few and far between, they leave little data to forecast losses. As a result, a contractor may only cause a pollution incident once, but that incident could prove catastrophic.

However, there are numerous loss control techniques that can be applied with little out-of-pocket expense to reduce this potential impact. Shown below are some general loss control practices that can be utilized by any contractor.

Education

Education must be the first and single most important step in any process. The contractor must educate employees to identify the environmental exposures inherent in day-to-day operations. There are a variety of training courses offered by many consulting firms that will assist employees in visualizing the exposure during the site walk-through.

Currently, employees performing the site walk-through may not realize the impact of oil-stained areas or stressed vegetation. They may be able to identify a vent pipe from an underground storage tank and understand that it will have to be removed. But do they understand that if the tank has been in the ground for any length of time, it may have leaked and caused not only subsurface soil contamination but also groundwater contamination?

Furthermore, employees must also learn to assess the areas on the perimeter of the job site. In one particular case, a road contractor was asked to construct a road in conditions where the water table had to be lowered. Wells were drilled at strategic locations throughout the site, and "dewatering" operations were performed. As the force creating the draw on the groundwater started lowering the water table, workers began to notice a petroleum smell in the water being pumped out of the wells. The project was shut down.

It was later discovered that the force from the dewatering operations also drew petroleum-contaminated groundwater from a leaking underground storage tank at a gas station on the perimeter of the site. If the contractor had realized the importance of investigating not only what was onsite, but also around the site, many headaches could have been prevented.

Education is also important in crisis and emergency response situations. In the event of a pollution incident, employees must know how to respond. They must first know how to characterize an incident and be careful not to create or enter unsafe environments. They must notify the appropriate authorities who have the ability to respond to pollution or hazardous incidents. (Each state has a list of emergency response contractors for use in these particular situations.) Lastly, provided the environment is conducive to worker conditions, the contractor must utilize onsite resources to prevent further spreading of contamination.

Environmental Assessments

Even though every site does not require an environmental assessment, most owners perform such assessments when they believe there is a problem. Surprisingly, many contractors do not routinely ask their owners if such an assessment has been performed. Just ask! If one has not been performed, so be it. But if one has been completed, it will provide all the essential information needed to take appropriate action. A good assessment provides the contractor with important information on the surrounding land use, groundwater conditions, and past uses of the property, as well as areas of concern identified onsite.

Tips on Contracts

A contractor can also reduce its environmental risk through contractual transfer. Indemnification is probably the most widely used method and, therefore, should include environmental issues. The contractor must negotiate indemnification language into the contract that prevents the contractor from being held liable for preexisting contamination. Often the issue is addressed in the indemnity section of the contract, and many times it is a stand-alone clause in the contract referred to as a "Preexisting Contamination Clause." It is essential to have a copy of an environmental assessment identifying existing contamination to create this clause.

To further protect a contractor from identifying or "finding" unknown contamination, a "Change in Conditions Clause" should be utilized. This clause will enable the contractor to make appropriate contract modifications (i.e., change orders, etc.) in the event contamination is uncovered or found. The contractor's attorney should prepare these type of contract items, and they should be executed within the contractor/client agreement.

A contractor also faces tremendous pollution liability as a result of subcontracted operations and, therefore, should give some attention to contractually controlling such vicarious liability. Probably the most frequently used method is insurance requirements. Many general contractors make a good faith effort to ensure that their subcontractors purchase appropriate insurance and that they are named as additional insureds on those policies. Usually, general liability, auto liability, and workers compensation are required. However, seldom, if ever, is Contractors Pollution Legal Liability (CPL) coverage necessary.

It was once thought that CPL coverage could not be a general requirement, but today more and more contracts are requiring it. The provision can be removed if you decide it may not be applicable, but otherwise, it should be present. At a minimum, it should be explored on a case-by-case basis.

Exposures Go beyond the Job Site

It is important to realize that environmental exposures do not exist exclusively at the job site. Contractors face other environmental exposures through transportation, disposal, and owned premises.

Nearly every contractor at one point or another has used refueling vehicles to refuel equipment at a job site. This presents over-the-road environmental exposures. Also, street and road or paving contractors may face the environmental exposures associated with transporting asphaltic cement. Environmental disasters can also arise from collisions with structures, such as tank trucks, transformers, unprotected fuel tanks, and so forth.

When it comes to disposal practices, the web of liability expands. Many contractors have disposed of materials for years in "licensed" or permitted landfills. Now the Environmental Protection Agency (EPA) under the Superfund program pursues potentially responsible parties (PRPs) to assist in the cleanup of abandoned landfills or disposal facilities.

The issue here is that if a contractor is identified as a PRP, in all likelihood they will be given a "de minimus" status. De minimus contributors are those that have contributed little volume of waste or materials. Although they will be asked to only contribute 2 to 5 percent of the total cleanup, that could mean hundreds of thousands of dollars if the total cleanup is only $20 million.

Lastly, consider the real estate that contractors currently own. This is another source of environmental liability. For example, contractors own maintenance yards with underground storage tanks (USTs). Have those tanks ever leaked? What are they used for? The site could have been owned for 25 years, providing routine maintenance on a variety of vehicles. Where did the waste fluids go?

Some contractors own batch plants, asphalt plants, and some even own quarries that can have a tremendous impact on groundwater in a particular area. Owned premises is another area a contractor must address to reduce the impact that environmental liability can have on a company.

Conclusion

Environmental liability need not be a frightening encounter. There are risk control techniques that, when effectively integrated into the contractor's risk management program, will help reduce the impact environmental liability can have on its operations. Most importantly though, contractors must open their eyes and realize that there are environmental exposures in their day-to-day operations. Remember, you don't have to be an environmental contractor to have an environmental exposure!