The Risk Manager, Fall 2004

By Barry Steinberg*

Whatever your area of practice, environmental issues lurk. Unfortunately, they may not be recognized until after it is too late to address them in a legally proactive fashion. If your practice involves real property, production, or manufacturing activities, there is obvious potential for environmental legal issues. And that is not limited to real property leases, purchases and sales. Mergers and acquisitions, as Halliburton learned all too late, may involve contingent environmental liabilities for long-ceased activities. Current or historic activities on adjacent property may implicate your client. Trusts and estates may have environmental legal implications, depending on the assets held.

While the risk of environmental legal exposure may be slight in most circumstances, the consequences of such exposure can be catastrophic. This is because liability for personal injury, remediation and property damage can exceed the value of the asset. With respect to remediation obligations, the liability is, in some circumstances, strict. And consider that most general liability and D & O insurance policies exclude from coverage claims arising from pollution conditions.

The concerns relate to good legal practice, ensuring that the client's interests are fully protected. Environmental inquiry by counsel will also protect against allegations of malpractice. So what are the warning flags that should alert the transactional attorney that further inquiry is not only appropriate, but necessary to satisfy practice standards?

  1. Is there real property involved? If so, what is the history of use at or adjacent to the site, including above and underground storage tanks?
  2. Are there assets being exchanged which are associated with industrial activities, now or in the past?
  3. Are there in the transaction documents provisions for representations and warranties that extend to environmental issues? Are they limited to the knowledge of the indemnitor or do they extend to facts?
  4. Are there now or have there been environmental claims, violations, orders, judgments, or notices that relate to the transaction?

When real property is involved, it is common practice to obtain an environmental assessment of the property, prepared by an environmental engineer. The assessment should satisfy the standards of the American Society for Testing and Materials Standard 1527-00, a standard devised to provide a defense to remediation liability under certain circumstances. The assessment is not necessary in every transaction, but certainly when warning flags are raised the judgment of whether there are environmental risks is best left to the environmental engineer, not the attorney. Identified risks can then be allocated between the parties through representations and warranties, indemnification, specialized insurance products, other risk transfer mechanisms, and escrowed funds. But a failure to recognize the potential of environmental liability will result in a failure to address the risk, with consequent exposure to both attorney and client.

*Barry Steinberg is a retired Army Judge Advocate colonel who served as the first Chief of the Environmental Law Division in the Office of the Judge Advocate General, Department of the Army. He currently is the managing partner of the Washington, D.C. office of Kutak Rock LLP, practicing environmental law.