Businesses and property owners can often have their own insurance companies pay for the costs to investigate and clean up environmental contamination on their own property under old liability insurance policies, such as commercial general liability (or CGL) policies.  Many older policies either do not have pollution exclusions or have pollution exclusions that courts have decided are unenforceable because they are too broad and ambiguous.  It often comes down to how your state law treats a particular policy’s pollution exclusion.  For instance, since 1996, Indiana courts have consistently held that pollution exclusions in various insurance policies are ambiguous and, therefore, do not exclude coverage for claims related to past environmental contamination.[1]    

While there are many nuances to pursuing insurance companies to pay for environmental claims, once an insurance company has agreed or been ordered to defend a claim, you and your lawyer may want to monitor how the insurance company allocates funds spent for the environmental consultant’s work to investigate and respond to the contamination.  You’ll want to do this because many, but not all, insurance policies have two buckets for coverage: a bucket for “costs of defense” and another bucket for “indemnification” costs.  An insurer’s duty to defend its insured is broader than the duty to indemnify.  Often, insurance policies do not set an upper limit on costs of defense, whereas indemnification costs are limited to the “policy limits”.[2]  Because the costs of defending a claim can often far exceed the amount of a settlement or judgment, the insurer’s duty to defend the insured is one of the most significant rights the insured has under a CGL policy.  

Here is an example of how such costs would be allocated in a simple car accident case.  If you were in a car accident, “costs of defense” would include the cost to pay for a lawyer to defend you from a lawsuit and the costs of an accident reconstruction expert to determine who caused the accident.  Indemnification costs would only be triggered after you were found at fault for the accident.  Indemnification costs would include the cost to pay for the repairs to the other driver’s car and any other damages up to the policy limits.  

In the context of environmental claims, there are some insurance companies that wrongly take the position that all costs spent for an environmental consultant are indemnification costs.  Some insurers do this because they don’t appreciate the need to allocate the costs between the two buckets.  Other less scrupulous insurers do this to try to allocate all of the environmental consultant’s fees to indemnification costs to quickly burn through the policy limits to try to prematurely end their duty to defend the insured.[3]    

One of the seminal cases on how these costs should be allocated is Aerojet-General Corp. v. Transport Indem. Co., 948 P.2d 909 (Cal. 1997).  In Aerojet, the California Supreme Court held that to fulfill the duty to defend, the insurer “must take reasonable and necessary efforts to avoid or at least minimize liability.”  Id. at 922.  “To defend meaningfully, the insurer must defend immediately.  To defend immediately, it must defend entirely.”  Id. at 921.  

Just as an accident reconstruction expert tries to determine the cause of a car accident, an environmental consultant is often tasked with trying to determine the nature and extent of soil, groundwater, and vapor intrusion (or indoor air) contamination in order to avoid or at least minimize liability.  This may include installing a network of groundwater monitoring wells to determine how the contamination is migrating and whether the contamination is impacted by fluctuations in the groundwater table.  It may also include conducting a Remedial Investigation / Feasibility Study (“RI/FS”), which is an in-depth study conducted to determine detailed site characteristics and define the extent and magnitude of contamination at a site, to evaluate potential impacts to human health and the environment and to establish cleanup criteria, and to evaluate cleanup alternatives. 

Just as the accident reconstruction expert’s work is in defense of the insured, so to is much of the work performed by an environmental consultant.  To that end, the Aerojet Court explained:

It follows that the insured’s site investigation expenses constitute defense costs that the insurer must incur in fulfilling its duty to defend if, and only if, the following requirements are satisfied.  First, the site investigation must be conducted within the temporal limits of the insurer’s duty to defend, i.e., between tender of the defense and conclusion of the action. Second, the site investigation must amount to a reasonably and necessary effort to avoid or at least minimize liability. Third and final, the site investigation expenses must be reasonable and necessary for that purpose.

Id. 

In Aerojet, the California Supreme Court held that the lower court of appeals erred by adopting an approach that the feasibility study of RI/FS was rebuttably not defense costs.  Id. at 927.  In light of its analysis, the Supreme Court held that an approach that assumed feasibility studies were indemnification costs was unsound and too “simplistic”.  Id.  

In addition, the California Supreme Court rejected the insurers’ argument that site investigation expenses cannot be defense costs if requested by the government.  The Supreme Court was clear that simply because the government ordered a RI/FS did not result in the cost being precluded from being considered a defense cost.  This is because “[i]t is well known that, by conducting the study itself, the insured may be able to avoid or at least minimize liability—both for the costs of the study and for any costs subsequent thereto.”  Id. at 924.  

The federal District Court of Idaho arrived at the same conclusion last year in Wells Cargo, Inc. v. Transport Ins. Co., 2011 WL 5080143 (D. Idaho Oct. 26, 2011).  There, the district court granted the insured summary judgment finding that RI/FS costs are generally defense costs[4] and decided it would need to hold an evidentiary hearing to make specific findings on allocating the costs between costs of defense versus indemnification costs.  Thereafter, the insurance company moved to have the issue of costs of defense versus indemnification decided by the Idaho Supreme Court or Ninth Circuit Court of Appeals.  The district court recently rejected the insurance company’s request finding that “There is also no substantial ground for difference of opinion concerning the Court’s determination that RI/FS costs are generally defense costs.”  Wells Cargo, Inc. v. Transport Ins. Co., 2012 WL 465479, *3 (D.Idaho Feb. 13, 2012).  

I’ve helped many businesses and property owners pursue these types of insurance recoveries.  And, you can read more about the allocation of costs of defense versus indemnity costs in a prior post.

Post-closing diligence is critically important when buying or selling environmentally-contaminated property.  Whenever contaminated property changes hands, one of the first questions asked is who will be responsible for cleaning up the contamination and obtaining closure from the appropriate regulatory agency.  Clients often turn to their lawyers to come up with the appropriate terms and conditions to best protect their interests, but ultimately the clients make the decision of the terms they are willing to accept and the risks they are willing to take.  But what happens post-closing? 

For example, assume a seller will remain obligated to “remediate the contamination in a diligent and commercially reasonable manner so as to promptly achieve closure with the responsible regulatory agency.”  Will the seller’s post-closing proposal to achieve closure by a decade of monitoring and natural attenuation, as compared to an active remediation system that can achieve closure in half the time, be interpreted by the appropriate regulatory agency or the courts in your jurisdiction as “diligent and commercially reasonable”? 

A recent case examining the problems that can arise when post-closing diligence goes astray is Houston Auto M. Imports North, LTD. v. R & A Harris South, L.P., 2012 WL 3628878 (Tex. Ct. App. Aug. 23, 2012).  There, the seller sold an automobile dealership to a buyer for $3.1 million.  The parties each had their own environmental consultant conduct pre-closing environmental due diligence.  As a result of their investigations, they discovered soil and groundwater contamination and suspected the contamination source to be a former underground storage tank.  Solvents used to clean automobiles were stored in the tank. 

The buyer turned to its environmental consultant for a “best case” and “worst case” assessment of the time and cost to remediate the contamination.  The consultant’s best case scenario involved a plan consisting of 5 years of monitoring with natural attenuation at a cost of approximately $180,000.  The worst case scenario, which assumed the contamination migrated offsite, involved more than 10 years of monitoring and an active remediation system to achieve closure at a cost of approximately $730,000.  As you might imagine, the closing was delayed while the parties haggled over the details. 

Eventually, the parties agreed to amend their purchase agreement and enter into an environmental indemnification agreement.  They agreed that the seller would be responsible for achieving regulatory closure through a proposal for monitoring with natural attenuation, for interacting with the regulatory agency, and directing the remediation to immediately commence and be conducted in a reasonably diligent and commercially reasonable manner.  Further, the seller agreed to indemnify and defend the buyer from and against all losses, including but not limited to, attorneys’ fees and environmental consultant expenses “incurred in investigating, preparing for, …  or defending against any action” arising from or in connection with the removal of any hazardous substance on or released from the property prior to the effective date of the agreement. 

To make a long story short, the regulatory agency approved the remediation plan, but the seller failed to abide by the plan by failing to conduct quarterly groundwater monitoring for a period of 3 consecutive quarters.  What was once thought to be a localized area of contamination with concentrations above regulatory closure levels increased in concentration by an order of magnitude and the contamination spread to the southern edge of the property at concentrations higher than regulatory closure levels.  Over the course of the next few years, the buyer had its consultant install borings and take its own groundwater samples and submit a competing site investigation and remediation plan to the agency. 

In 2008, 6 years after the closing and 4 years after the agency first approved the remediation plan of natural attenuation and monitoring, the buyer filed a lawsuit against the seller for breach of contract and declaratory judgment.  The buyer sought to recover almost $86,000 in attorneys’ fees and about $80,000 in environmental consultant fees, costs, and expenses.  The buyer's damages were incurred as a result of the environmental contamination on the property and the seller’s alleged failure to diligently pursue remediation of the property and complete the remediation within a reasonable time after closing. 

The seller raised several defenses.  The seller first argued that the delays in the beginning of the remediation activity were ordinary delays typically experienced when dealing with a government agency.  Second, the seller argued that while it missed some groundwater monitoring events, no enforcement action was filed against it by the agency.  Finally, based on the seller’s analysis of other properties in the State’s voluntary cleanup program, 15 years was a reasonable time for remediation and achieving closure so that the remediation was, in fact, progressing diligently. 

The trial court rejected each of the defenses and ruled for the buyer.  The trial court concluded that the seller’s failure to obtain a certificate of completion within 4 years constituted a breach of its contractual obligations and awarded the buyer approximately $117,000 in damages.  The trial court also declared that the seller would be required to indemnify the buyer for future costs and expenses the buyer may incur as a result of the seller’s cleanup and remediation activities. 

Ten years to the day after the August 23, 2002 closing on the real estate transaction, the Texas Court of Appeals affirmed the trial court’s decision finding that “the trial court could have reasonably concluded that it was not ordinarily prudent or diligent for [the seller] to go over one year without conducting groundwater monitoring as required by [the agency], especially when the chance for expansion of the contamination plume was known.”  And, in the years between the closing and the beginning of trial, the contamination spread from a localized area near 2 monitoring wells to the southern boundary of the property with results above the protected concentration levels.  In addition, the Court of Appeals held that the failure to conduct the groundwater monitoring and reporting to the agency constituted a breach of contract.  Finally, the Court of Appeals upheld the finding on the declaratory judgment claim. 

In summary, it is often critically important that the seller and the buyer each have a knowledgeable and experienced environmental consultant for post-closing advice and to make sure the post-closing obligations are diligently pursued.  In the long run, the cost of a great consultant who can work with the other party’s consultant, pulling or prodding to keep the project moving toward closure, will likely be less expensive and time consuming than the cost of resolving a dispute through a lawsuit.

Can a court find that an environmental consultant engaged in malpractice for failing to conduct a proper Phase I Environmental Site Assessment (“Phase I ESA”) even if the consultant’s report complies with ASTM standards?

The answer depends on several factors. 

All Appropriate Inquiries (“AAI”) is the process of conducting environmental due diligence or a Phase I ESA to determine prior uses and ownership of a property and assess conditions at the property that may be indicative of releases or threatened releases of hazardous substances at, on, in, or to the property. As I explained in a prior post, U.S. EPA’s regulations do not prohibit using a standard other than ASTM standards to comply with AAI. Although, U.S. EPA has explicitly recognized compliance with two ASTM International Standards as compliant with the AAI requirements: ASTM E1527-05 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process” and E2247-08 “Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process for Forestland or Rural Property.” 

While U.S. EPA and certain states recognize compliance with ASTM Standards as compliant with the AAI requirements, mere compliance with ASTM standards may not automatically absolve an environmental consultant of liability in connection with a malpractice claim. The legal decisions that address ASTM standards specifically suggest that courts do not have to limit their focus to whether the consultant complied with just ASTM standards because other applicable standards may also be relevant to the court’s determination. In fact, ASTM E1527-05 states:    “[u]sers are cautioned that federal, state, and local laws may impose environmental assessment obligations that are beyond the scope of this practice.” Section 1.1.4.  Further, as ASTM E1527-05 states: “[t]his ASTM standard is not intended to represent or replace the standard of care by which the adequacy of a given professional service must be judged, nor should this document be applied without consideration of a project’s many unique aspects.” Section 1.6.

This is because professionals are typically judged by the standard of care required of their profession. Many states have adopted the “same or similar community” standard of care with respect to professional malpractice lawsuits. That is, unless a consultant represents that he or she has a greater or lesser skill or knowledge, the consultant’s services will be measured against a reasonable consultant who exercises the ordinary skill and knowledge normally possessed by members of that profession in good standing in similar communities.   

If the “reasonable consultant” would have used the ASTM standard, the consultant’s services will be measured against this mark. Some states, on the other hand, by law specifically incorporate ASTM standards as the standard of conduct for performing Phase I environmental site assessments. Those states remove any ambiguity as to the standard of conduct. 

An instructive case is WATCO v. Pickering Environmental Consultants, Inc., 2007 WL 1610093 (Tenn. Ct. App. 2007). In WATCO, a buyer conditionally agreed to purchase real estate from a trustee bank if the bank first obtained a satisfactory Phase I ESA of the property. The consultant performed the assessment and prepared a written report stating that it had conformed with the applicable professional standard in its assessment, that it had not detected any hazardous materials or environmental concerns at the subject property due to current or past uses of the property, that it had not identified any significant environmental concerns in the surrounding area of the subject property, and that it did not recommend further environmental review. The buyer purchased the property in 1995. During residential development of the property in 2004, the buyer discovered the remains of a municipal garbage dump on the adjacent property that extended under a portion of the subject property and sued the consultant for negligent misrepresentation and professional malpractice. 

The consultant’s letter agreement stated that the scope of work was in conformance with the scope of ASTM E1527-94, but the court did not confine the inquiry to just whether the consultant solely breached ASTM E1527-94. Instead, the court looked to whether the consultant breached the standard of care in actual practice by environmental professionals in conducting Phase I assessments in Shelby County, Tennessee or similar communities in 1995, and whether that standard of care required more efforts than simply complying with the ASTM standard. For environmental consultants, as with other professionals, the standard of care is often defined as the exercise of skill or knowledge normally possessed by members of that profession in good standing in a similar community. Thus, in deciding whether the consultant has breached the duty of care owed to a client or to a third party, a court will determine what the “reasonable consultant” would consider to be an appropriate course of action under similar circumstances. Several courts have interpreted the “reasonable consultant standard” as requiring environmental consultants to take advantage of new techniques and methods available within the profession. For consultants performing environmental site assessments, one standard of care is that specifically defined by ASTM.

As the Court of Appeals stated in Watco, whether or not an environmental consultant complied with relevant industry standards and applicable regulations provides some evidence as to whether the consultant’s conduct was negligent or constituted professional malpractice, but is not necessarily outcome determinative.[1] Nor does compliance with regulations or other standards establish that the consultant was not negligent.[2]

The WATCO court was ultimately persuaded by each sides' expert witnesses who agreed that the ASTM standard “was a guideline to be used, but was not exclusive.” One expert testified that as ASTM standard practice by definition includes flexibility in the way the practice is applied to any given situation. Consequently, application of the standard practice will vary between consultants practicing in different areas at different times. Further, the court looked to a 2000 study of approximately 150 Phase 1 reports by the Association of Soil and Foundation Engineers. The ASFE study found that while 73% of the proposals states that they would conform to the ASTM standard E1527, not a single report actually was in strict conformity with the standard, indicating that the relevant standard of care and the ASTM E1527 standard practice were not equivalent at the time of the investigation in 1995. In the end, the court found that the ASTM Standard and the standard of care for judging professional malpractice lawsuits were not equivalent at the time of the Phase I assessment when conducted in 1995. (Nevertheless, the Tennessee Court of Appeals upheld the trial court finding that Pickering had not committed malpractice.)

Also, in Bonnieview Homeowners Association, LLC v. Woodmont Builders, LLC, 2006 WL 1982882 (D.N.J. 2006), a federal district court considered whether an environmental consulting firm (PBS &J) was negligent in the performance of an environmental assessment when the firm’s report failed to inform the plaintiffs of contamination. Although the major issue before the court was whether PBS & J owed a duty to the plaintiffs, the Court concluded that PBS & J provided substantial evidence that it was not negligent when PBS& J proved that it complied with ASTM Standard E1527-97 and environmental standards established by the New Jersey Department of Environmental Protection’s Technical Requirements for Site Remediation.

In summary, compliance with ASTM standards is only one of many factors a court will consider in determining whether an environmental consultant was negligent. Though industry standards weigh heavily in persuading the court that a consultant fulfilled his or her duty, those standards are not necessarily conclusive or determinative. Furthermore, in some instances, consultants may be required to exceed the ASTM requirements to fulfill their duty. 

I’m often surprised to find that some environmental consultants fail to include warranties as a part of their scopes of work, contracts, and final reports. 

Why is this important?

The majority of states follow a principle of law that only paying clients can rely on your professional opinions and representations and sue you for malpractice when your professional opinions and representations are wrong. 

Some states, however, have adopted the principle of law called negligent misrepresentation.  Under that theory, a stranger – someone who is not your paying client – can rely on your professional opinions and representations if you are aware that the stranger is relying on your work, the reliance is reasonable, your work turns out to be incorrect, and the end result is that the stranger has suffered damages proximately caused by or resulting from your incorrect statements. 

You want to control who can rely on your professional opinions and representations.  Here is a good warranty statement,[1] slightly modified, that you might consider including with your scopes of work, contracts, and reports filed with agencies.  Of course, I am not providing you legal advice and you should review this with your lawyer familiar with your state’s law before using this or similar language. 

LIMITATIONS OF WARRANTY

Engineer’s services, data, opinions, and recommendations described in this report are for Client’s sole and exclusive use, and any unauthorized use of or reliance on the data, opinions, or recommendations expressed herein by anyone other than Engineer’s Client is prohibited without Engineer’s express written consent.  The services described herein are limited to the specific project, property, and dates of Engineer’s work.  No part of Engineer’s report shall be relied upon by anyone to represent conditions at other times or properties.  Engineer will accept no responsibility for any damages suffered by anyone other than the Client as a result of reliance upon the data, opinions, or recommendations in this report.

Engineer’s services are subject to all limitations, qualifications, and indemnifications enumerated in the Client’s contract and terms and conditions governing the work.  Engineer’s findings, interpretations, opinions, and recommendations are probabilities based on Engineer’s professional judgment of site conditions as discernable from the limited, and often indirect, information provided by others, information available to Engineer at the time the work was performed, or information observed or developed by Engineer using the methods specified in the scope of work.  Engineer does not warrant the accuracy, completeness, or validity of information and independent opinions, conclusions, and recommendations provided or developed by others, nor does Engineer assume any responsibility for documenting or reporting conditions detectable with methods or techniques not specified in the scope of work.  Maps and drawings in this report are included only to aid the reader and should not be considered surveys or engineering studies.  The investigation described in this report was also conducted within the context of agency rules, regulations, action levels, and enforcement policies in effect at the time Engineer performed its work.  Later changes in agency rules, regulations, action levels, or policies may result in different findings, interpretations, opinions, and/or conclusions than those expressed in this report.

Engineer has striven to perform the services in a manner consistent with that level of care and skill ordinarily exercised by other environmental consultants practicing in the same locality and under similar conditions existing at the time Engineer’s services were  performed.  No other warranty is either expressed or implied in this report or any other document generated in the course of performing Engineer’s services. 

Nothing serves as a death knell for lawsuits in federal court more often than exaggerated claims propped up by wobbly expert testimony.  This rang true for the City of San Diego’s lawsuit seeking approximately $250 million in damages from Kinder Morgan and its predecessor companies for the contamination of approximately 166 acres of City-owned land surrounding and underlying Qualcomm Stadium (the “Property”).  On January 25, 2013, the United States District Court for the Southern District of California entered summary judgment in favor of Kinder Morgan against all of the City’s claims.  California v. Kinder Morgan Energy Partners, L.P., et al., 2013 WL 314825 (Jan. 25, 2013)

The facts giving rise to City’s lawsuit showed that Kinder Morgan and its predecessors operated the Mission Valley Terminal, located next to the Property, since the 1960s.  The Mission Valley Terminal serves as the central hub for distributing gasoline in San Diego County.  As early as 1992, the City was on notice that Kinder Morgan and its predecessors released petroleum products into the soil, contaminating the Property and groundwater.  In 1992, the California Regional Water Quality and Control Board (“Water Board”) ordered the investigation and remediation of the contamination at the Mission Valley Terminal.  To comply with this order, Kinder Morgan and its predecessors spent approximately $60 million addressing the contamination. 

Unhappy with the progress of the remediation, in 2007, the City sued Kinder Morgan and its predecessor alleging the petroleum releases from the Mission Valley Terminal contaminated the Property and damaged the City.  The City claimed approximately $250 million in damages, including $126 million in damages to remediate its water supply and $120 million in real estate “loss of use” damages.  

Kinder Morgan dismantled the City’s claims.  It began by moving to strike the City’s expert for having offered unreliable opinions.  Then, Kinder Morgan attacked the City’s damages claims as speculative, pie-in-the-sky aspirations, with no footing grounded in fact. 

The Court began its opinion by granting Kinder Morgan’s Daubert motion striking the testimony of the City’s damages expert, Mr. Ray Forrester.  The expert argued that on top of the $60 million spent to date addressing the contamination, Kinder Morgan should be required to spend another $126 million dollars cleaning up the contamination to “background” levels.  The Court rejected the expert’s opinion as “personal” and “subjective” finding that: (1) outside of this litigation, the expert had never previously offered an opinion that the required cleanup standard was to background conditions; (2) the Water Board does not require remediation to background conditions; and (3) the expert was not aware of any petroleum site in California—or the country for that matter—where the stated goal was to clean up to background.  The Court struck the expert’s opinions as unreliable deciding “the lack of support for Forrester’s opinion indicates that he is not employing the same level of intellectual rigor of someone in his field, as his conclusions are predetermined by unsupported propositions.”

The Court then entered summary judgment against the City’s $126 million water damages claim finding it speculative, merely possible, and contingent.  The evidence showed that while the City wanted to use the aquifer, it had not used the aquifer for drinking water purposes since 1936.  The undisputed evidence showed that the City has had “no operational water supply wells in the ground since that time, had no comprehensive water project developed, and has not performed any feasibility studies to determine whether such a project could be implemented.  …  Since that time, the population of the City has grown exponentially, the area over and around the Basin has been developed for commercial and residential purposes, numerous new environmental and regulatory rules and laws have been enacted, a stadium was built on top of the aquifer, and the size and complexity of the City government and fiscal situation has changed significantly.”  Therefore, the Court concluded that the City could not show that using the groundwater was even feasible, let alone hampered by Kinder Morgan’s actions, stating: 

"Ultimately, the link between Kinder Morgan’s conduct (petroleum discharges) and the City’s water damages and injury (inability to use the Mission Valley basin for water extraction and storage) is speculative, merely possible, and contingent. The City could decide to abandon its water project after it conducts the necessary tests, could be unable to finance the project, could have difficulty during the political approval process, or could decide that the project is not feasible after all. Further, if the City could not obtain permits or gain regulatory approval, the water project would never be implemented. Under these circumstances, the City would not have suffered damages because the City could not have used the basin for water extraction and storage in any event. Because the City lacks evidence of a viable water project, it cannot establish at trial that its damages comply with the basic tenet of California law against speculative, merely possible, or contingent damages."

The Court observed that “the City could have cured the speculative nature of its water damages by either presenting a fully-developed, ready-to-build water project that has passed all technical, regulatory, political, and fiscal hurdles or by proffering evidence that a water project on the Property is viable and could be implemented.” 

Finally, the Court rejected the City’s $120 million loss of use damages claim.  The Court reasoned that the City was only entitled to the rental value of its land as it existed during the time of Kinder Morgan’s wrongful occupation.  During that time, the City used the property as a stadium.  The City failed to present any evidence that the land suffered a decrease in rental value, “likely because the City has collected rent under its existing leases on the lot, and has not lost any revenue due to the contamination or remediation efforts.  Further, the City has never cancelled or interrupted any other use of the Property due to the contamination or remediation, including collect football games, Monster Jam or Supercross events, or Major League Soccer games.”  Ultimately, the Court entered judgment in favor of Kinder Morgan and its predecessors “because the City has not complied with applicable statutes of limitation nor gathered the evidence necessary to meet its burden of proof at trial.” 

Since the order, the City filed notice of its intent to appeal the decision to the U.S. Court of Appeals for the Ninth Circuit, while Kinder Morgan has filed a bill of costs seeking reimbursement of over $327,000 in costs from the City.  The City is reported to have spent approximately $4.75 million over the past five years pursuing the lawsuit,[1] and will incur additional costs appealing the order.