CHAPTER 5 EVALUATING THE EXISTENCE, NATURE, AND EXTENT OF ENVIRONMENTAL LIABILITIES AND RISKS: GETTING THE FACTS
| Jurisdiction | United States |
(Nov 1988)
EVALUATING THE EXISTENCE, NATURE, AND EXTENT OF ENVIRONMENTAL LIABILITIES AND RISKS: GETTING THE FACTS
TRC Environmental Consultants, Inc.
Englewood, Colorado
I. INTRODUCTION
No legal opinion regarding environmental risks or liabilities associated with a natural resource or real property transaction will be sound if based on an environmental assessment containing erroneous, incomplete, or misleading facts. The environmental assessment is usually the key instrument for collecting information on the existence, nature, and extent or environmental liabilities and risks at a site. All too often, however, these assessments consist of random data collection and are conducted without appropriate strategy. As a result, important environmental concerns may not be addressed, while the reliability of the data collected is uncertain.
The focus of this paper is on the logic and rationale behind the scope and conduct of an environmental assessment for natural resource and real property transactions. This is the meeting ground between the attorney, who must evaluate and determine ways to minimize or apportion the environmental liabilities and risks, and the consultant, who actually collects the data and provides the technical analysis and interpretation. Unless both the consultant and attorney understand the objectives, scope, and inherent uncertainties of the assessment program, the entire purpose of conducting the assessment — understanding and controlling the risks — is defeated.
It is essential to understand that environmental assessments are as much an art as science. Environmental risks at a site are often invisible, or hidden behind walls and below the ground. Unlike the evaluation of a visible and predictable structure, a great deal must be gleaned from a relatively small amount of information, usually through interpretation and judgment. As examples presented in this paper show, compensating for lack of judgement by increasing the amount of data collected is usually doomed to failure, since no reasonable number of samples can cover the huge volumes of land, water, and materials present on even small sites. Instead, we must rely on professional judgement to tell us where to look, what to sample and analyze, and what the results mean. While the risk of a steel bridge failure, based on the relatively uniform and predictable properties of the material, can be assessed with reliable accuracy, it is dangerous to expect such precision and accuracy from an environmental assessment, even in the most capable of hands.
Getting the right facts and understanding the risks is never an easy matter. While we may begin with a general approach to environmental assessments, the fact-finding mission must ultimately be structured to address the unique conditions, history, and concerns of each site and client. The following sections of this paper discuss factors and issues that should be considered when setting the scope of an assessment, the logic and rationale that drive the assessment program, and finally, and perhaps most important, interpretation and communication of the results.
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II. SETTING THE SCOPE AND OBJECTIVES
On the surface, it would seem that setting the scope and objectives of an environmental assessment program for a natural resource or real property transaction would be fairly easy. After all, the approach has become relatively standardized — review the records, inspect the site, collect some samples, and write a report. The objective would seem clear enough — determine if there are any environmental problems at the site — while the scope is defined by the budget. Unfortunately, this approach is as likely to lead to the right combination of knowledge and risk reduction as pulling the lever on a slot machine.
What you should look at, where you should look, and the level of detail warranted are all dependent on several factors. The risk-taking philosophy of the client, due diligence, and other factors that affect the scope and objectives of an environmental assessment are discussed below.
A. Risk-Taking Philosophy of Client
The scope of an environmental assessment can range from a brief review of records and site inspection to a comprehensive investigation program. Because no level of effort can precisely define or eliminate all risks, the most important factor controlling the scope of the assessment is usually the risk-taking philosophy of the client. This is the risk that an assessment program will miss an environmental problem that could result in costs or liabilities of a certain magnitude. The biggest risk-takers conduct no environmental assessment at all, although this option is rapidly disappearing as regulations such as New Jersey's Environmental Cleanup and Responsibility Act (ECRA)1 and the policies of banks and insurance companies mandate environmental assessments. Clients who have discovered the costs associated with liability under Superfund2 , on the other hand, tend to have a much different risk-taking philosophy. A certain degree of risk exists at any level of effort, due to the inherent uncertainties associated with environmental assessments. A lower degree of risk of missing some environmental problem normally means a higher assessment cost, all other factors (such as the capabilities of the consultant) being equal.
In order to select an appropriate assessment scope, it is necessary to understand and, to the maximum extent possible, quantify the risk that is associated with each level of effort. For example, if surface soil contamination is suspected in an area, a small number of widely spaced samples will determine if the contamination is widespread for a relatively low cost; however, there is a risk of missing localized contamination which could lead to future cleanup costs. At some point, there is a balance between the potential size of any localized contamination and the associated cleanup costs, and the cost of additional samples necessary to further reduce the risks. This balance between assessment cost and the risk of missing some problem of a certain magnitude is the risk-taking philosophy of the client.
At a minimum, the assessment program should be designed to reduce environmental liabilities and risks by 1) finding the big problems, 2) reducing the maximum size of potential problems that may still exist,
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and 3) providing a level of effort that demonstrates that the client was diligent in his examination of the property.
B. Due Diligence
Showing due diligence is a poor second choice to finding environmental problems before they become potential liabilities. The level of effort required to show due diligence is ill-defined and, if based on common good practice, a constantly moving target. Even if "innocent landowner" status is preserved under statutes such as CERCLA3 , the costs of defending the innocent still remain high. Nevertheless, it still makes good sense to ensure that any environmental assessment being contemplated is arguably diligent.
One of the greatest incentives for due diligence when conducting an environmental assessment of a property prior to purchase is the preservation of "innocent landowner" status as defined by CERCLA, whereby landowners are not liable for releases of hazardous substances from their facility when "the release or threat of release of a hazardous substance and the damages resulting therefrom were caused solely by ..... an act or ommission of a third party"4 . Unfortunately for land purchasers, third parties as defined by the statute do not include the seller of the property unless several conditions are met. The hazardous substance must have been on the property at the time of purchase, the buyer must not have known or have had reason to know that the hazardous substance was present, and, the buyer "must have undertaken, at the time of acquisition, all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice in an effort to minimize liability."5
The appropriate level of inquiry depends on several factors. A mining company familiar with mine wastes and potential environmental problems could not claim ignorance of an acid drainage problem because it should have been aware of the potential for such a problem based on its specialized knowledge and experience. Purchase of a property at a price far below its normal "uncontaminated" value may be considered evidence that the buyer was aware of the contamination problem at the time of purchase. Finally, if the presence of the hazardous substance was obvious or common knowledge at the time of purchase, or if its presence could have been determined by "appropriate inspection", then the buyer could still be found liable under CERCLA.5
Clearly, the key to preserving innocent landowner status under CERCLA is demonstrating by a preponderance of the evidence that the environmental assessment conducted at the time of acquisition was appropriate and consistent with good practice. Because the practice of environmental assessment for real property transactions is relatively new, the term "good practice" is somewhat subjective and will likely change significantly over the next few years as more experience is gained by environmental consultants. At present, some clients are reluctant to commit funds sufficient to conduct even a superficial inspection of the site, while others have established comprehensive requirements of their own, such as mandatory soil and groundwater sampling.
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The best way to ensure that the scope of the assessment is adequate is to retain a consultant experienced in environmental assessments for natural resource or real property transactions and familiar with the types of facilities being assessed. This is particularly true for industrial and mining...
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