Environmental Remediation Contracting: Summary of a Symposium (1994)

Peter W. Tunnicliffe

Hazardous Waste Action Coalition

• Contracting for hazardous waste cleanup:

  • Performed by engineering and science firms who are hired to clean up the hazardous waste problems created by others.

  • Cleanup firms are not responsible for the existence of waste at sites, yet the strict, joint and several liability standards of the federal Superfund law imposes liability on these firms for any association with the site.

  • Firms can not “bet the company” and risk bankruptcy by being held responsible for the hazardous waste problems created by others.

• Pitfalls/Cautions for Cleanup Firms—Potential liability as:

  • Owner/operator

  • Transporter

  • Generator

  • “Deep pocket” (i.e., the only one associated with the site with any money, or, in the case of a federal site, easier to sue than the federal government).

• Cases against cleanup firms are documented in Hazardous Waste Action Coalition report, Trends in Contractor Liability for Hazardous Waste Cleanup.

• HWAC recommendations:

  • Establish negligence as the standard of liability by which cleanup firms will be judged (i.e., cleanup firms will be held liable for their fault, and not liable in the absence of fault)

• Utilize limitations of liability (i.e., caps) above which the persons/organizations responsible for the existence of the waste would be held liable (so as not to bankrupt the cleanup firm).

• Utilize combinations of indemnification and risk sharing to ensure that the most capable firms perform cleanup operations.

• Conclusion: Overall goal of the hazardous waste cleanup program is to protect human health and the environment. Qualified firms will not “bet the company” and risk bankruptcy merely to provide a public service by performing hazardous waste cleanup services, while the real polluters remain insulated from liability.

Excerpts from a February 1, 1993 Letter to Patrick Meehan, Office of the Deputy Assistant Secretary of Defense (Environment) from the Hazardous Waste Action Coalition (HWAC)³

° ° °

HWAC believes that a reasonable risk sharing program between DOD and its environmental restoration firms is critical to the satisfactory completion of DOD's mission to restore its own hazardous waste sites. HWAC testified to this effect at the March 10, 1992 and the April 24, 1991 hearings of the Environmental Restoration Panel of the House Armed Services Committee . . . The primary recommendations of the coalition are as follows:

1. DOD should provide an indemnity for strict, joint and several liability arising under both federal and state laws. Current federal and state laws potentially hold the contractor responsible regardless of the degree of fault.

2. Cleanup contractors should be liable to the extent of their negligence up to some level above which the government would assume responsibility for claims. The amount for which the contractor is responsible should be related to the size of the contract.

3. DOD should provide contract language that establishes a time limit after completion of the work for the contractor's responsibility. This would eliminate “long tail” claims that can occur long after the work has been performed.

4. Changes to liability terms should be implemented as a matter of overall DOD policy. Implementation by the Services or Commands should be established

   3	The footnote numbers in the excerpts quoted here are not necessarily the same as the numbers in the original letter.

and made known well in advance of any procurement to the contractor community.

5. In addition to adequate risk sharing mechanisms, DOD should provide special incentives such as reduced liability limits to encourage contractors to use innovative technologies.

Studies of risk sharing between DOD and its environmental restoration contractors have been ongoing for several years. HWAC has been active in the dialogue since its inception . . . The information presented in this package is intended to assist DOD in preparing the study mandated in the National Defense Authorization Act of 1993. As stated above, this issue is not new to Congress, and has received significant deliberation to date.

HWAC remains concerned that DOD may, through the absence of risk sharing with its environmental restoration contractors, be attempting to pass off liability for its own waste to the firms hired to clean up the waste. Such a practice leaves the public exposed to claims for damages from exposure to wastes from DOD facilities which cannot be compensated by the environmental restoration firms. HWAC is also concerned that claims arising long after the work was performed may be judged by hazardous waste standards and practices that do not yet exist. Finally, risk sharing is needed to ensure development of much-needed innovative technologies to permanently solve DOD' s complex waste problems.

The bases for HWAC's concerns are presented below in a format that addresses the three areas raised in your December 22, 1992 letter. HWAC would like to meet with you to discuss these and other concerns associated with the cleanup of operating and closing DOD facilities—in particular the impact of EPA's recently released final guidance for CERCLA Section 119 indemnification on DOD cleanups.

1. Recent Cases Illustrating The Liability Problem

HWAC has long predicted that third-party damage suits against environmental restoration firms at Government-controlled sites would be an inevitable consequence of hazardous waste site cleanups. However, we predicted that such claims might not arise for many years after the work was performed, because many injuries alleged in such claims, like cancer and other biological harm, may not manifest themselves for decades (the so-called “long-tail” problem). Unfortunately, these suits are already starting to appear, substantially sooner than anticipated. The following are a few illustrations.⁴

• In connection with the Superfund program, two environmental restoration firms have been sued recently in Montana for work they performed for EPA, and at EPA's direction starting in 1985. The allegations are that the firms' efforts helped spread the contamination from the Superfund site, and the

theories of recovery include both strict liability under federal and state law, and negligence.⁵

• In Texas, an environmental restoration firm involved in a state Superfund site cleanup has been sued by the residents and landowners adjacent to the site. They claim the firm's actions further contaminated their properties, despite the fact that those actions were approved in advance by the Texas authorities. The theories of recovery include trespass, nuisance, negligence and strict liability.6

• The residents in the area surrounding DOE's Fernald, Ohio plant sued DOE's management and operating (M&O) contractor for allowing the spread of wastes onto their properties, and obtained a settlement of $78 million.7

• A similar case against two DOE M&O contractors was filed in December 1991 by residents in the area of DOE's Mound plant near Dayton, Ohio.8

• The United States Court of Appeals for the Ninth Circuit has held that a site excavation and grading contractor who unknowingly disturbed hazardous wastes while grading for a planned housing subdivision was both an “operator” and a “transporter” under CERCLA.9

• The United States District Court for the Middle District of Georgia has held that the so-called Government Contractor defense does not extend to environmental restoration contractors.10 In addition, in considering whether the contractor was an agent of the government of purposes of a slightly different defense (the Government Agency defense), the court found Section 119 of CERCLA to be persuasive evidence that a RAC is not an agent of the government. The court reasoned that Section 119 contemplates that a RAC be independently liable for its negligence and other tortious behavior, since the government at its option may indemnify the RAC, whereas in a principal/agent relationship the government would automatically be liable for

the actions of its agent. Thus, the court found the Government Agency defense to also be inapplicable . . .

2. Indemnification Provisions

The following are examples of the bases and types of indemnification (risk sharing) that have been offered in the past.

1. Public Law 85-804

Both DOD and DOE have offered indemnification for restoration contractors under the authority of Public Law 85-804. That law, along with its accompanying Executive Order 10789, authorizes designated agencies (including DOE and DOD) to indemnify contractors from liabilities associated with activities that (a) are unusually hazardous or nuclear in nature and (b) facilitate the national defense. DOD's hazardous waste sites are the product of decades of disposing of hazardous byproducts of our nation's defense arsenal. The restoration of those sites is an integral part of DOD's mission in furtherance of the national defense and falls squarely within the intended application of Public Law 85-804 . . .

In addition, DOD frequently uses its authority under P.L. 85-804 to carry out activities that are more tangential to the national defense than the restoration of sites that have been polluted through armament production. See, e.g., Remington Arms Co., ACAB No. 1238, May 8, 1991, 4 ECR ¶ 59 (granting $75 million for health and life insurance costs of retirees who had worked for past operator of DOD ammunition plant); LDH Instandsetzungswerke & REM Ryder System-EWK GmbH, ACAB No.s 1236, 1237, Jan. 17, 1991, 4 ECR ¶ 58 (granting bid and proposal costs to bidders on DOD solicitation that had mislead bidders by overstating anticipated contract requirements).

2. Title 10 U.S.C. § 234: Research and Development Firms Exposed to Unusually Hazardous Risks

Title 10 U.S.C. section 234 authorizes DOD to indemnify research and development firms that are exposed to unusually hazardous risks. In light of the merging technology and scientific understanding of hazardous waste contamination and control, this authority applies to many facets of environmental restoration.

3. Price-Anderson

The Price-Anderson Amendments Act of 1988 requires DOE to indemnify any DOE contractor (or subcontractor) whose contract involves the risk of public liability arising out of or resulting from a nuclear incident.11 This authority to indemnify DOE's Environmental Restoration Management Contractors (ERMC) from risks associated with the handling of nuclear material or byproducts.

4. CERCLA Section 119

CERCLA section 11912 waives strict liability for cleanup firms under Federal (but not state) law, and imposes negligence as the standard of liability under Federal law.

Section 119 also authorizes EPA to provide indemnification to Superfund cleanup firms for negligence.

Of course, as noted above, Section 119 is not the only source of authority for indemnification of contractors at DOD sites. Although some concerns have been raised in the past over whether Section 119 supersedes DOD's indemnification authority under Public Law 85-804, there is no indication that Congress intended such a result. Absent some expression of an intent to repeal DOD's P.L. 85-804 indemnification authority, that authority remains unless it cannot be reconciled with Section 119. Because Section 119 is a general indemnification authority, applicable to all Superfund restoration contractors, it is easily reconcilable with the more specific P.L. 85-804, which applies only to contractors of select agencies whose activities are unusually hazardous and deemed to facilitate the National Defense. ¹³

Until very recently, EPA has utilized its authority under Section 119 to provide indemnification for its Superfund contractors. NPL Superfund sites where the remedial action is managed by the Army Corps of Engineers on EPA's behalf have also been included in EPA 's indemnification program. Regrettably, EPA's Section 119 indemnification has been limited in a number of respects:

• It covers only negligence liability, to the exclusion of strict liability under State law or liability under other State law theories.

• It only extends to Superfund sites (i.e., sites listed on the National Priority List). Many DOD hazardous waste sites are not included on that list, and therefore are not subject to the indemnification authority of Section 119.

Finally, on January 25, 1993 EPA published guidelines suspending use of CERCLA § 119 indemnification for all new Superfund contracts. In addition, EPA will limit retroactively the indemnification contained in Superfund contract issued since 1986 . . .

HWAC has requested that EPA withdraw the final guidelines, or suspend guideline implementation, until further consideration of the impact of the guidelines on the implementation of the Superfund program can be performed. In particular, HWAC has highlighted the potential of the final guidelines to halt Superfund cleanups, in particular construction activities, and to inhibit use of innovative technologies in Superfund cleanups.

5. DOE Cost Accountability Rule

DOE has adopted a “cost accountability” rule for its M&O contracts that incorporates both risk-sharing and a standard of liability based on negligence.¹⁴ This rule reflects DOE's recognition that it cannot disclaim liability for its own waste. Under the rule, the contractor is responsible for the first layer of financial exposure from claims—similar to a deductible under an insurance policy. The “deductible” is determined

based on the fee or profit earned by the contractor during the award fee evaluation period in which the liability arose. The rule also provides protection for the contractor based on a negligence standard rather than strict liability, and expressly excludes reimbursement to the contractor for actions that are grossly negligent or the result of intentional misconduct. The rule also provides for mandatory flow-down of . . . . [accountability] to subcontractors, thereby ensuring equitable treatment of all firms involved in the cleanup process.

6. FAR Clause 52.228-7, Insurance - Liability to Third Persons

FAR clause 52.228-7 “Insurance - Liability to Third Person,” typically incorporated into cost-reimbursable contracts, provides for reimbursement of certain third-party claims. This provision is used by DOD and other agencies when appropriate.¹⁵ Reimbursement, however, is subject to contract appropriations. Liabilities exceeding those appropriations must be born by the contractor.

7. Private Sector Indemnification

Private parties contracting for environmental restoration services typically are legally and financially responsible themselves for the contaminated site involved because they meet the Superfund law 's definition of “owner” and “operator.” Prudent cleanup firms take care to work with clients that are likely to be able to meet those financial commitments in the future, rather than going out of business and leaving the cleanup firm as a prime target defendant for future third-party claims. In many if not most cases, however, the cleanup firm also obtains an agreement by the client to be responsible for all third-party liabilities above a certain amount (including all strict liability).

In particular, environmental restoration firms generally seek to obtain the following provisions in their contracts for private sector activities:

• A clause establishing negligence as the standard of care. For example, the negligence standard is generally defined in private sector contracts as follows: “in accordance with generally accepted professional engineering or scientific practice at the time and place where the services are rendered.”

• A cap, or ceiling, on the firm's total liability for negligence or other related claims.

• Full indemnification for claims based on strict liability.

• A requirement that the RAC will be provided with all known information and documents relating to the existence, quantity, type, and location of known or suspected hazardous materials at the site.

These clauses are based on the theory that the site owner/operator, and not the environmental restoration firm, is responsible for the existence of waste at the site. Therefore, the environmental restoration firm should not be primarily liable for claims resulting from site cleanup activities. Limitation of liability claims have been upheld as

valid and enforceable, and in accordance with public policy, by the courts. See Markborough California, Inc. v. Superior Court, 227 Cal. App. 3d 705, 277 Cal Rptr. 919 (Cal. App. 1991). More detailed information about the practices of private firms in performing hazardous waste cleanups can be obtained by reviewing the testimony of individual firms provided at the March 10, 1992 hearing of the Environmental Restoration panel of the House Armed Services Committee on the liabilities facing firms involved in environmental restoration of DOD bases and facilities.

HWAC has issued a document entitled, “Standard Terms and Conditions for Hazardous Waste Contracts.” This document . . . contains many of the above-referenced provisions, as well as an explanation of these provisions.

3. Availability of Insurance

Ideally, the risk of potential liabilities associated with environmental remediation projects would be handled the same way other such liability risks are: by purchasing appropriate amounts of liability insurance. In environmental restoration, however, the uncertainty of the risks involved, the high potential liabilities, and the strong potential for claims far into the future have combined to make available pollution liability insurance wholly unsatisfactory. While some limited insurance coverage is currently available, it remains very expensive, subject to high deductibles, and limited in maximum amount. Most importantly, pollution liability insurance is (and probably always will be) available only on a “claims made” basis, as opposed to an “occurrence” basis. This effectively means that there is no coverage available for the “long tail” claims made years after the work is completed.

The lack of available insurance not only exposes restoration firms to inordinate risks but, by restricting their ability to obtain required performance and payment bonds, it affects their ability to participate in DOD restoration projects at all. By statute (the Miller Act), DOD is required to obtain performance and payment bonds from qualified sureties for construction work performed as part of DOD's environmental Restoration programs. Because sureties view themselves as potentially liable to the same extent as their principles, they have been reluctant to provide such bonds to date.¹⁶

The U.S. General Accounting Office, in a February 5, 1991 report entitled “Hazardous Waste -- Pollution Claims Experience of Property/Casualty Insurers,” presented the results of a study of the potential liability of twenty insurers for costs of cleaning up hazardous waste sites. The nine firms responding to the survey indicated that they paid $106 million in claims in 1989 alone. The report concludes that “the large number of open claims (about 50,000) and pending law suits over insurance coverage for pollution liability (about 2,000) indicates that insurers may have more at stake than their past pollution claim experience would otherwise suggest.” HWAC agrees with this report, particularly in light of the recent acceleration of claims against cleanup firms, and

believes that what little insurance is now available to restoration firms may dry up altogether in the future.

Insurance may never be available to provide complete coverage for environmental restoration firms, but a properly structured DOD risk-sharing program could serve to stimulate development of reasonably-priced insurance covering a portion of the risk. HWAC believes that the key is to assure insurers that the risk they assume in issuing a pollution liability policy is limited both in maximum amount and in time. In other words, reasonable fixed limits on contractor liability both in amount and in duration after the work is performed, above and beyond which DOD becomes responsible for claims, would provide the certainty that insurers need to offer reasonably priced policies covering liabilities below those established limits.

As we have observed in the past, it is ironic that environmental restoration firms—in no way responsible themselves for the existing contaminated sites—should assume liability for damages arising from the extremely hazardous task of restoring waste disposal sites to their original condition. Restoration firms arrive after the damage is done, and their efforts improve, rather than threaten, public health and safety.

The recent acceleration of DOD hazardous waste site cleanups mandates a speedy resolution of the liability dilemma facing environmental contractors to bet the entire assets of their firm every time they agree to participate in the restoration of a DOD hazardous waste site. Not only does such a policy reduce the number of qualified firms willing to participate in these restoration programs, but it increases costs to DOD (through the factoring of risk into contract price) and ultimately leaves the general public exposed to claims for which there may be no adequate compensation.¹⁷

DOD hazardous waste sites are the product of decades of DOD efforts to further this nation's defense. The nation as a whole assumed the risk—as well as the benefits—of those efforts, and it is now incumbent on the nation to bear the responsibility for restoring these sites to a safe condition. HWAC and its members are pleased to have a role in this enormous task. That role, however, does not justify our complete assumption of the risks associated with these extremely hazardous sites . . .