OF THE SUPERFUND PROGRAM
                    United States Environmental Protection Agency
                      Office of Policy, Planning, and Evaluation
                             Office of Policy Analysis
                             Washington, D.C. 20460
                                 May 20, 1992
                             •'QUARTERS LIBRARY


       The Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA), known as "Superfund," has been interpreted by the courts to provide a strict, joint
and several (where harm is indivisible), and retroactive liability standard.  While there are
varying claims about the effect of this standard on the regulated community and on the
implementation of the Superfund program, the data and analyses to support such claims have
frequently been either too limited, potentially biased, or outdated.  The main objective of this
report is to identify some of the indirect effects of the Superfund program (stemming primarily
from its liability-based approach), as well as to identify gaps, limitations, and weaknesses in the
existing data and analyses.  In meeting this objective, the report also provides a framework for
more rigorous research.

       The information used in this report came from a broad literature search, a small number
of surveys conducted by the private sector, government reports, and informal conversations with
parties identified as potentially affected by the liability standard.  Consequently, the information
included in this report should be regarded as preliminary, and any application of this information
should be considered  in this context.

       Based on the general findings of this study,  it is apparent that additional research would
be required before one could reach definite conclusions about the indirect effects of the
CERCLA liability  standard.  Because of the need for further research, this report does not
attempt to  characterize these effects in terms of positive or negative benefits, nor does it provide
an analysis of related  costs.  Until the information discussed in this report is substantiated and
data gaps are filled, such analysis cannot be conducted.

       Finally, this report is not  meant to be all-conclusive; rather, it is meant to be a first step
in identifying certain indirect effects of Superfund's liability standard. We hope that this report
will stimulate dialogue amang policymakers and Superfund stakeholders on indirect effects, as
well as spark much needed additional research.

                            TABLE OF CONTENTS
      Buyer and Lender Liability  	   5
      Environmental Assessments	   6
      Responses by Lenders and Purchasers to Environmental Problems	   9

      Mergers and Acquisitions 	  14
      Waste Minimization	  16




      Programs Affecting Hazardous Waste Management Practices 	  26
      Environmental Assessments of Commercial Waste Management Facilities  	  27
      Indemnification	  29
      On-Site Versus Off-Site Management of Wastes 	  29
      Nonhazardous Wastes  	  30
      Transportation	  30



       Shortly after his appointment, EPA Administrator William Reilly directed the Agency to
conduct a thorough self-appraisal of the Superfund program to respond to many of the criticisms
of the program. Known as the Superfund Management Review, or the 90-Day Study, this
appraisal identified several noteworthy areas that need further investigation. One such area was
the need for EPA to identify ways to measure and communicate the direct and indirect effects of
the Superfund program beyond solely the cleanup of sites on the National  Priority List (NPL ~ a
list of the country's highest-priority hazardous waste sites).  The direct effects are
comprehensively presented in EPA's Report to Congress: Progress Toward Implementing
Superfund. and thus will not be discussed in this  report.  This report to Congress is produced
each fiscal year by EPA's Office of Emergency and Remedial  Response. The indirect effects
may be major, but are often overlooked in assessments of the program in favor of more visible
direct  effects, such  as site studies, investigations,  and cleanups. Specifically, the 90-Day Study
task group speculated  that the Superfund strict, joint and several liability standard has indirectly
affected the behavior and activities of certain business and industry sectors, and continues to do

       The  Comprehensive Environmental Response Compensation and Liability Act
(CERCLA) and the 1986 Superfund Amendments and Reauthorization Act (SARA) are
comprehensive statutes governing the Superfund  program.   Under the Superfund laws, any of the
following parties may be held liable for cleanup costs resulting from releases or threatened
releases of hazardous substances as well as costs  related to  natural resource damages: current
and past owners and operators of facilities contaminated with hazardous substances; generators
who directly or indirectly arranged for the disposal or transport of any hazardous substances to
the site; and transporters of any hazardous substances to the site who participated in any way in
selecting the site.1

       Superfund's liability standard has been interpreted uniformly by the courts as strict, joint
and several  (where harm is indivisible), and retroactive.  Strict liability holds a party liable for
any harm caused by its activities, regardless of fault. Historically, strict liability has been imposed
for  activities that are by their  nature very hazardous.2  Joint and several liability holds parties
liable for the full amount of damages caused by contamination at a site,  even when they may
have contributed only a portion of the substances present at the site, unless they can demonstrate
that the environmental contamination is divisible and there  is  a fair basis for allocating cleanup
costs.  Finally, retroactive liability holds parties liable for damages resulting from acts committed
before CERCLA was enacted.
   1  Excluded from liability are parties who may have a security interest in the property (e.g., financial institutions)
but who did not participate in managing activities affecting the site, and government entities that may involuntarily
acquire sites through abandonment or tax delinquency, as long as they did not contribute to the contamination.  This
exemption is discussed more thoroughly in the section on property transactions.

   2  There are defenses to strict liability under CERCLA. Section 107(b) provides defenses based on an act of God,
an act of war, and certain acts or omissions of third parties.


       Congress intended the reach of Superfund to be broad.  During the 1986 reauthorization
of CERCLA, Congress resisted suggestions by industry to change the liability standard. Neither
the House nor the Senate bill changed language pertaining to liability, except for clarification of
"innocent landholders" (SARA Section 101(35)). Superfund was designed to ensure that those
parties who were in any way responsible for contributing to contamination of sites would pay to
clean up those sites, to spread out the large costs of cleaning up our industrial legacy of
hazardous waste sites among as many responsible parties as possible, and to create incentives to
manage currently generated wastes in an environmentally sound manner.

       The information in this report has been drawn from a variety of recent government
documents, business reports and publications, and trade journals, as well as input from experts  in
industries affected by Superfund.  This information gathering included informal  discussions with
members of the  hazardous waste management industry, chemical manufacturing industry,
insurance industry, lending institutions, environmental services, and state government officials.
Because of confidentiality, the source of information is not always specifically identified with the
findings.  The information used in this report represents various views that may or may not be
biased.  Further, data presented in this report that were not generated by EPA are also not
endorsed by EPA. As mentioned throughout the report, the findings are only preliminary and in
most cases need further verification and quantification to allow  valuable analysis where possible.

       While the preliminary findings of this report discuss the  indirect effects of Superfund's
liability standard, it is not assumed that Superfund is the only program that may be causing these
effects.  However, the scope of this report did not include apportioning the contribution of
Superfund and other federal and state hazardous waste programs to these effects. Nevertheless,
because other federal and state hazardous waste programs are also likely to play an important
role in affecting  the behavior of industry and certain business  sectors, a brief discussion of these
possible effects as they relate to these programs follows in the Appendix to this  report.

       Finally, this report is not meant to be all-conclusive. Rather, it is the first step in
identifying certain indirect effects of Superfund's liability standard.  It is intended to provoke
thought and provide focus for more rigorous and, where possible, statistical analysis that can
verify these preliminary findings.  The report emphasizes  the changes that have occurred because
of Superfund, without attempting  to address the overall cost-effectiveness of these changes.
While most of the report's findings can certainly be viewed as having  environmental benefit,
some may be debatable, and none addresses the related costs. The costs associated with these
actions are intended to be the subject of future  analysis.

       The preliminary findings of this report show  that, in many cases, the retrospective
element of the Superfund liability standard, in combination with the future value of the property,
has the potential to create clear financial incentives  for parties who are engaged in purchasing or
acquiring industrial property, as well  as the institutions that invest in or finance such transactions,
to identify potential contamination problems and to  take steps to protect themselves against any
attendant financial liabilities.  Also, the report  shows that  the retrospective aspect of Superfund
liability has in some cases led some potentially responsible parties to clean up problem sites
before conditions worsen or contaminants migrate beyond property boundaries, potentially
making them subject to Superfund.

       This report found that rhe liability standard also has created significant financial
incentives that affect current waste management practices. Because the Superfund liability
standard is strict, a party now engaged in operating a hazardous waste management facility, in
transporting hazardous wastes, or in generating hazardous wastes or wastes containing hazardous
substances can be liable in the future  for damages at a site, even though it complies with existing
regulations and follows reasonable management practices.3 As shown by the report's findings,
this potential for future liability, especially given the large costs associated with cleaning up
Superfund sites, is partially responsible for creating incentives to minimize waste generation, to
reduce the amount of wastes managed in land-based facilities (landfills, surface impoundments,
injection wells), and to exercise care in selecting hazardous waste management facilities to which
wastes are sent for disposal. Such pollution prevention policies and behavior have the potential
to reduce the number of future NPL and state sites.  This investment in prevention could result
in long-term benefits to society, in terms of reduced cleanup  costs, reduced risk to human health
and the environment, and reduced damage to natural resources.

       The Superfund liability standard ensures that any  financially solvent party who was
responsible in any way for the contamination at a site can be held liable for cleanup costs. While
sources used to develop this report were limited, or  need further verification and study, the
preliminary Findings show that this standard has possibly helped to create legal and financial
incentives for the private sector to clean up many environmental problems that otherwise would
most likely not be addressed through government programs.  Further, it may be playing an
indirect, but major, role in motivating many companies to insure consistent and strict compliance
with other environmental laws, to improve their current waste management practices, and to
adopt waste minimization and pollution prevention programs.

       For example, corporate environmental departments have become involved in issues that
arc central, rather than ancillary, to management decisions.4  In addition, major corporations
now conduct environmental  assessments as standard practice. They view this practice as a form
of insurance before merging with or acquiring properties  that may present liabilities  related to
environmental problems. Environmental audits required  by buyers and lenders increased more
than four times between 1986  and 1989, and are expected to  continue to increase. Corporations
report they have conducted numerous cleanups not because of mandated state or federal
authorities, but rather because of real  estate transaction requirements, and avoidance of future
problems resulting from contamination.  On the other hand, there is conflicting information
about the effects on small businesses.  The U.S. Small Business Administration and the American
Bankers Association  have expressed concern that lenders  may be reluctant to provide credit to
small  businesses with potential environmental liabilities.  However, in a recent survey of small
manufacturers conducted by the  National Association of Manufacturers, respondents indicated
that this was a problem only three percent of the time.5
   J  However, there is no CERCI.A liability for a range of federally permitted releases-e.g., permitted effluent

   4 See Financial World. January 23. 1990, p. 41.

   5 The NAM Small Manufacturing Survey. National Association of Manufacturers, March  1991.


       In terms of the insurance industry, high-risk investments and the decline in the market in
the early 1980s make it hard to determine if Superfund liability affected the decrease in the
underwriting of environmental impairment liability insurance policies. However, some companies
have re-entered the environmental impairment liability insurance market - coverage is expensive,
restrictive, and limited to well-run facilities. Some industry observers expect the environmental
impairment liability insurance market to expand as insurers become more familiar with evaluating
potential environmental risk.  Further in-depth research is needed to better characterize and
evaluate the effect of Superfund liability on the insurance industry.

       This  report found that there is a likelihood that waste management practices have been
indirectly affected by Superfund's liability standard as well.  By 1985, most major companies
included complete environmental audit  programs (conducted annually or monthly) as part of
their corporate environmental policy, and Superfund liability, insurance, and loan requirements
are often indicated as major factors in the prevalence of compliant waste management practices.
However, small companies generally are not as interested in pursuing environmental audits.

       Both Superfund and the Resource Conservation and  Recovery Act (RCRA) have
substantially contributed to the explosive growth of environmental services in the past decade.
These services include environmental consulting and engineering, chemical analysis,
environmental audits, and hazardous waste treatment. This  dramatic growth is expected to
continue--the industry's revenues, currently estimated $120 billion dollars, are expected to
increase at 10-15 percent per year, doubling in less than a decade.6
   *  Environmental Business Journal. Enviroquest, Inc. (San Diego), April 1990.



Buyer and Lender Liability

       The Superfund liability standard has fundamentally affected the way commercial and
industrial real estate transactions are conducted in the United States today. Because purchasers
of property are at financial risk if the property is contaminated with hazardous substances, it
behooves them to investigate the property for potential environmental problems. CERCLA
provides certain defenses to liability - the security interest exemption (protects those holding
indicia of ownership without participating in management) and the innocent landowner defense.

       Property buyers face potential financial liabilities for cleanup costs from other federal
environmental statutes, such as RCRA, and from state environmental laws. The costs of
litigation and the potentially large damage awards associated with private lawsuits if there are
health or property damages to third parties present additional financial risks.  These actions  are
brought under state tort laws, with the injured parties suing for redress.  Such "toxic torts" are
becoming a concern of firms that are potentially responsible parties  (PRPs) at sites where
contamination has migrated from the site.  The potential financial risks posed by hidden
environmental problems are widely discussed in the financial and business literature. Articles
describing the potential financial  risk to buyers and lenders involved in commercial and industrial
property transactions began appearing in the business and financial literature in the mid-1980s.
Trade organizations for lenders have kept their members abreast of legal developments in this
area.  Recently, articles about environmental liabilities connected with property transactions or
involving foreclosures have appeared in major newspapers, such as the Wall Street Journal and
the Washington Post7.  The Agency promulgated a rule in April 1992 that clarifies lender
liability and a number  of bills have been introduced in Congress to address the way the
Superfund liability standard is applied to financial institutions.

       Lenders include banks, savings and loans, venture capitalists, underwriters, and pension
funds. Lending institutions are claiming that they may face two kinds of financial risks from
environmental liabilities when extending credit or  making loans to commercial or industrial
businesses.  The first is that the environmental liability could compromise the ability of the
borrower to pay back the loan or could render the collateral value of the property worthless. As
noted by Mark Bennet, president of TOXI-CHECK, "Such problems are similar to traditional
credit risks, which can  leave a lender in an unsecured position with an owner whose equity
investment has been  severely diminished."8  The second, and less frequent risk  is that the lending
institution itself could become an "owner or operator" of the facility, as defined in CERCLA or
in comparable state statutes, and could be held liable for all the cleanup costs associated with the
property.  In addition,  the lender may be sued for damages  associated with personal injury.  Such
cleanup costs often can be far in excess of the commercial value of the property and of the
   7  A bibliography of articles through October 1988 is included in the EPA report Selected Current Practices in
Property Transfer Environmental Assessment. September 1989.

   8  "Lenders: The Environmental Policy Force of the 1990's," Real Estate/Environmental Liability News. December
7. 1989.

original loan made by the lender.  Many articles have focused on how lenders might be
considered owners and operators of a facility and on how to avoid liability as a lender.9

       A series of court cases beginning in 1985 has begun to define the exposure of lenders to
environmental liabilities in property transactions under CERCLA.10  Environmental laws
recognize the limited extent to which a secured creditor may be responsible for environmental
problems in the first place.  In this regard, CERCLA provides an exemption from the definition
of "owner and operator" for anyone "who, without participating in the management of a vessel or
facility, holds indicia of ownership primarily to protect his security interest." The major legal
issues regarding this exemption revolve around defining what constitutes "participated in the
management" and when ownership goes beyond holding a mere security interest.

Environmental Assessments

       Environmental assessments are used to identify whether there are any hidden
environmental problems that could compromise the collateral value of the property.  The results
of these assessments also can be used by insurers, when defining the underwriting risks and
determining the extent of coverage and premiums to be charged. The results of the assessments
alert both the buyer and the lender that there are environmental problems that need  resolution
before the property transaction is consummated.

       As described in Environmental Due Diligence.  The Complete Resource Guide for Real
Estate Lenders. Buyers. Sellers, and Attorneys, an environmental assessment is usually conducted
in two phases so as to limit costs.  Phase 1 audits generally consist of a review of the  facility's
operating records; an examination of federal and state records for the site; a review of aerial
photographs; interviews with plant personnel and other parties knowledgeable about the site; a
review of properties surrounding the site for any evidence of contamination; a walk-through of
the facility; and, depending on the nature of the facility, sampling and testing of soil, surface
water, and groundwater. Phase 1 audits generally cost from about $2,500 to $4,000 for
multifamily buildings  and from about $4,000 to $12,000 for manufacturing facilities.11  Phase 2
audits may be undertaken, depending on the results of the Phase 1 audit.  These can be more
costly when the nature of the problems uncovered requires extensive sampling of soil, surface
water, or groundwater.

       While very limited information  is available on the frequency with which assessments are
used in connection with commercial and  industrial property transactions, it is apparent that the
number and frequency of assessments conducted have significantly risen.  A survey conducted by
   9 For example, see, "Superfund Suits: Minimizing Exposure," Mortgage Banker, July 1989, pp. 63-68: "Secured
Creditors and Superfund: Avoiding the Liability Net," Environrnental Reporter. July 28, 1989, pp. 609-615; and "The
Ability to Control Test:  Expanding CERCLA Liability Beyond Lenders?" Toxics Law Reporter, November 28, 1990.
pp. 883-840.

   10 The leading cases are: U.S. v. Mirabile: U.S. v. Maryland Bank & Trust; U.S. v. Fleet Factors; and In re
Bergsoe Metals Corporation.

   11 Environmental Due Diligence, The Complete Resource Guide for Real Estate  Lenders. Buyers. Sellers, and
Attorneys. The Bureau of National Affairs. Inc.. 1984, p. C-21.

Robert Morris Associates in mid-1987 found that most of the lenders responding to the survey
did not have specific loan policies in place to deal with potential environmental liabilities and did
not require the account officer to report to higher management levels should environmental
concerns surface.12 The respondents, however, did indicate that they thought environmental
audits should be used more frequently, but not necessarily for all commercial and industrial
loans. A large portion of the respondents felt that audits should be required for certain higher-
risk industries, such as chemicals and heavy manufacturing industries.  The survey indicated that
lenders were most concerned with potential soil and groundwater contamination and with general
contamination  from hazardous substances. A study that examined industrial property
transactions in Illinois during 1987, undertaken to support development of Illinois' property
transfer program,  also indicated that environmental assessments were conducted for relatively
few of the  transactions."  And a similar result was found in an analysis of industrial property
transactions in Georgia during 1986-1987."

       By  comparison, in more recent years, there has been a spate of articles in the business
and financial literature detailing the potential financial liabilities that can befall unwary buyers
and lenders and the steps they should take to avoid them.  According to the literature, the use of
environmental  assessments has increased markedly, to the point that it has become standard
practice for most financial institutions.

       This increase is reflected in a telephone survey of 200 mortgage bankers (selected by the
Mortgage Bankers Association) conducted for Boelter Associates.15  While the Agency has not
verified the findings of this study nor views it as comprehensive and statistically strong, the  data
show  preliminary results that deserve further study.  The survey found that environmental audits
were conducted for approximately 70 percent of recent commercial and industrial  loans,
compared to 15 percent three years  earlier (that is, in 1986).16 Of these, about three-fourths of
the loans received a Phase 1 audit, and about half received a Phase 2 audit.  Respondents in the
survey expect audits to increase to about 85 percent in the next  three years (that is, by 1992).17
Some of the problems identified in the  survey related to Superfund  and some did  not. The most
frequent problem  identified by the survey was asbestos in buildings, followed by an array of
contamination  problems involving hazardous substances  and underground storage  tanks, such as
contamination  of surface or groundwater or of soil (see Table 1).
   12 Environmental Risks: When Your Assets Become Liabilities. Robert Morris Associates, 1988.

   1J Policy Guidance Document: Responsible Party Transfer. Illinois Environmental Regulatory Group, 1988.

   14 "An Analysis of the Costs and Benefits of RCRA Regulations Versus CERCLA Liability," prepared for EPA's
Office of Policy Analysis by Leila Kim, August 1989.

   13 "Mortgage Bankers Environmental Assessment Survey," prepared for Boelter Associates by Shugoll Research
and Jaffe Associates, November 1989.
   16 Ibid., pg. 12.

   17 Ibid., pg. 33.

Table 1
Contaminated surface or groundwater
Underground storage tanks
Hazardous substances in general
Leaking underground storage tanks
Soil/ground contamination
Chemical spillage
Improper waste disposal
Lead in paint
Contaminated drinking water
Indoor air quality problems
Don't know
% Reporting
Source: Shugoll Research and JafFe Associates, "Mortgage Bankers
Environmental Assessment Survey," prepared for Boelter Associates,
November 1989.

       A survey of lenders conducted by the Bureau of National Affairs in 1989 also found that
requiring environmental assessments was standard operating procedure. All the lenders
responding to the survey indicated that  they used environmental assessments to deal with the
problem of financial liabilities associated with environmental problems.18

       The potential market for environmental audits is quite large. The study by the Bureau of
National Affairs estimated that about $35 to $40 million per year would be spent on audits of
environmentally risky property in connection with mortgage loans. Data from a survey
conducted by the Department of Housing and Urban Development (HUD) indicate that the
outstanding volume of commercial and  industrial mortgages is about $534 billion, and that about
$150 billion of new mortgage loans for commercial and industrial properties are written each
year.19 Unfortunately, there are no direct estimates of the number of mortgage loans issued
annually. However, using the percent distribution  of mortgage loan amounts from the Boelter
survey, the average size of mortgage loans for commercial and industrial property would appear
to be about $5 to $6 million.20 Using HUD's figure of $150 billion of new mortgages, one can
calculate that about 30,000 of such mortgage loans for commercial and industrial properties are
made annually in the U.S.  Assuming that a typical Phase 1  audit costs about $2,300 and that
85% of loan properties could be audited in the future years (from the Boelter survey), the
potential market could be on the order  of $60 million per year, not including any subsequent
Phase 2 audits which happen less frequently.

       Although potential expenditures in this market may be considerable, they pale in
comparison to the cost of cleaning up NPL sites, and in some cases, of non-NPL sites.  The
major function of property audits is to help buyers or lenders avoid incurring liability or losing
equity because of unknown environmental problems.  Without an environmental audit, if the
property is contaminated, the contamination  would go undetected. Over time, the environmental
harm may worsen, and contaminants may  migrate beyond the property boundary. In these cases,
property value decreases, liability risks increase, and the costs related to cleanup may be larger
than if dealt with earlier.

Responses by Lenders and Purchasers to Environmental Problems

       When environmental problems are found during environmental audits, lenders  and
purchasers have a number of options for responding:  (1) they can go forward with the transaction
under the previously negotiated terms; (2) they can require that the contamination be cleaned up
before completing the transaction; (3) they can terminate the transaction; or (4) they can
restructure the terms of the transaction.
   '* "Environmental Due Diligence; The Complete Resource Guide for Real Estate Lenders, Buyers, Sellers, and
Attorneys."  The Bureau of National Affairs, 1989, p. 3.

   19 "Survey of Mortgage Lending Activity, 1989," U.S. Department of Housing and Urban Development, April  1990.

   20 The average loan size is calculated by multiplying the average loan size in each size category (indicated on page
10 of the Boelter survey) by the percent of loans falling in that category, and then summing the products obtained for
each category. If one assumes that the average size of mortgages in the "greater than $20 million" category is between
$35 and $50 million dollars, then the overall average mortgage size falls between $5 million and $6 million.

       Restructuring the transaction may involve the provision of indemnification by a financially
viable seller or a reduction in the sales price.  As indicated in the business literature,
indemnification often is required anyway to guard against undiscovered problems.  Some banks
are reluctant to become involved in making loans connected with property having any
contamination problems because of the unfamiliarity of lending personnel with the risk posed by
contamination problems and the uncertainties inherent in mitigating such problems.  Other
financial institutions have set up special departments to evaluate potential financial exposure
from contamination problems and to factor this into lending decisions (e.g., General Electric
Finance Corporation).

       For example, the Federal Home Loan Bank System has provided the following guidance
to banks regarding situations in which banks can decline to extend credit because of
environmental concerns:

         o     a structure's location over a landfill or other solid waste disposal site;
         o     the presence of asbestos that cannot be contained or removed safely;
         o     soil and groundwater contamination on or around the subject property;
         o     existing  resource test results indicating levels of contaminants exceeding
              government thresholds;
         o     the presence of polychlorinated biphenyls (PCBs);
         o     radon levels requiring extensive capital improvements or long term maintenance;
         o     conditions that represent violation of environmental or health statutes; and
         o     the fact  that properties are subject to litigation involving various government

       Currently, limited information  is available on how frequently environmental problems  are
identified when commercial or industrial property is transferred or when lenders make loans to
finance the ongoing operations of businesses.  Information developed from the survey for Boelter
Associates suggests  that, for those commercial  or industrial loans where environmental audits
were conducted (i.e., in approximately 7 out of 10 cases), environmental problems were found
19% of the time.22  Where environmental problems were found, commercial and industrial real
estate projects were terminated 22% of the time, and were restructured in some way almost one
third (32%) of the time.23 The survey data indicate that corrective actions were "required"
seven percent of the time, but did not indicate if such actions were actually conducted (sec
Charts 1  and 2).
   !l Thrift Bulletin. February 6, 1989.

   ~ "Mortgage Banker Environmental Assessment Survey", op. cit., pg. 18.

   23 Ibid., pg. 20.


                            CHART 1
       Incidence of Environmental Audits and Problems
      Associated with Commercial and Industrial Loans j
I  40%

=5  20%
          All C&l Loans      Receive Audits
Source Mortgage Banker Envionmertal Survey.
   Shugol Research and Jsfle Associates.
   Noverrte 1066
                                                       percentage of all
                                                       C & I Loans
Problems Found   Corr. Action Needed
              Effect on Loans When Environmental


Sauce: Mortgage Barker Ervrormertei Sirvey,
   Shugd Research and JaBe >
   Nt»errt», 1969

       Information from New Jersey's Superfund program indicates that cleanups are required
for about 45 percent of industrial property transactions subject to the Environmental Cleanup
Responsibility Act (ECRA).24 However, ECRA deals with industrial properties that are the
most likely to have contamination problems. These properties generally represent about a fifth
of the property transactions the state is asked to review to determine whether they are covered
under ECRA. The cleanup costs for the bulk of the sites handled by  the ECRA program
average about $260,000 per site, but about seven percent of the sites had cleanup costs in excess
of $1 million, and about a third of the sites had cleanup costs of less than $50,000.25  In
contrast, Connecticut reported cleanup costs averaging only about $50,000 to $75,000.26

       It is difficult to draw other than very tentative conclusions regarding the extent of cleanup
activity that is being undertaken in connection with property transfers and the issuance of
mortgage loans. Derivations using mortgage loan data suggest that there may be about 30,000
commercial and industrial property transactions annually.  Assuming that cleanups would be
undertaken for about seven percent  of such transactions (from the Boelter survey), about 2,100
cleanups would be performed annually.

       Another approach for estimating the potential for cleanups prompted by property
transactions is to focus on the "high-risk" industrial properties covered under New Jersey's
ECRA.  Information on New Jersey's program and from the two studies of industrial property
transactions in Illinois and Georgia suggests that the annual turnover of industrial properties (in
the Standard Industrial Codes (SlC's) covered by ECRA) ranges from about 1 to 5 percent.
Census data indicate that, nationally, there are about 667,000 industrial  establishments in the
SIC's covered by ECRA. Assuming an annual turnover for these properties of about two percent
(at the lower end of the 1 to 5 percent range) suggests that there are  on the order of 13,000
transactions of "high-risk" properties annually.  If the percentage of such properties with
contamination problems is about 45 percent, as in New Jersey, every year about 6,000 industrial
property transactions would have contamination problems.

       The percentage of properties at which cleanups might be undertaken is unclear.  But,
based on the concerns of lenders and buyers evidenced in the literature  and in informal surveys,
it is likely that a large fraction of the environmental problems would be cleaned up.  Assuming
that 7 percent (2,100) cleanups would be conducted (from the Boelter survey), and using $50,000
as a lower bound for average cleanup costs  and $260,000 as an upper bound (from New Jersey's
ECRA program), the amount of money expended for national cleanups  related to property
transfers might be  in the range of $105 to $546 million per year. Considering that New Jersey
has considerably more sites proposed for listing or already listed on Superfund's NPL than most
states, using data from this state may inflate this national  estimate.  These  numbers are highly
speculative and may change significantly as more information becomes available.  However,
regardless of the exact numbers, it is clear that many environmental problems have been
   24 Derived from ECRA Report-Fiscal Year 1989, New Jersey Department of Environmental Protection, Figure 7,
p. 12: ECRA Update. NJDEP. Vol. 2, No. 1, January 1990, p. 1.

   25 ECRA Annual Report: Fiscal Year 1989, Clean-up Projects List. New Jersey Department of Environmental
Protection, 1990; 1988 ECRA Progress Report. Clean-up Projects List, NJDEP. 1989.

   26 Information supplied by the Connecticut Department of Environmental Protection, April 1990.


               identified and are being cleaned up that otherwise would have remained unknown and could
i               have resulted in costlier cleanups because of more extensive environmental damage,
                      These cleanups also provide the benefits of preserving property value, preventing
               exposure from off-site contamination, and avoiding costs related to liability.  The surveys and
               literature referenced here and the information from states with property transfer programs show
               definite increasing trends in environmental assessments and related corrective actions.  However,
               more in-depth, objective research is necessary to verify these findings. For example, objective
               formal surveys with financial institutions, auditors, sellers, or buyers would provide more
               quantitative information about the impacts of Supertund's liability standard on property

                          EFFECTS ON CORPORATE BEHAVIOR

Mergers and Acquisitions

       CERCLA is silent on the extent to which parent or successor corporations are potentially
liable for cleanup costs at Superfund sites.  Congress left the task of establishing the framework
for determining such liabilities up to the courts.  The courts have been clear that successor
corporations resulting  from mergers or consolidations retain the CERCLA liabilities of their
predecessors. When a corporation purchases all the assets of another corporation, in general, it
does not acquire the liabilities of the former company unless:  (1) it expressly or impliedly
assumes those liabilities; (2) it continues essentially the same operation; (3) the transaction is a
de facto merger or consolidation; or (4) the transaction is a fraudulent effort to avoid liability.
Any corporation that purchases the property and assets of another company and continues to
operate it can expect to retain the CERCLA liabilities of the former company.27

       Parent corporations generally are  insulated from the liabilities of their subsidiaries.
However, courts may "pierce the corporate veil," depending on the degree of separation of the
corporations, the control exercised by the parent corporation, and the importance of the public
interest among other considerations. Alternatively, a parent corporation may be found directly
liable as an owner or operator if it exercised enough management control  over the subsidiary.
Whether a parent corporation will be held liable will depend on the nature of the facts and the
law of the state or circuit in which the case  is brought.  Generally, the CERCLA liabilities of
subsidiaries may pose  significant risks to their parent corporations, and in  an increasing number
of cases, parent corporations have been found to be responsible for the environmental problems
created by their subsidiaries.28 In addition,  recent court cases have held a  corporation's officers,
employees, and individual shareholders liable under various environmental statutes if they
personally controlled the corporate activity.29

       An informal survey of less than nine hazardous waste generators and commercial
hazardous waste management facilities indicates that environmental liability is considered when
planning a merger or acquisition.  Major corporations report that the use of environmental
assessments is now standard operating procedure.30 In short, the business literature advises
corporate buyers to know the  environmental issues when buying properties or companies  and to
thoroughly investigate  them for potential  environmental liabilities.31 For companies, this
   :  David E. Dearing, "Successor and Parent Corporations: Liability for CERCLA Response Costs," Environment
Reporter. February 2, 1990, pp. 1764-1768.

   28 Albert M. Cohen, "Environmental Liabilities of Parent Corporations," NBA Magazine, March 1990.

   29 Albert M. Cohen, "Environmental Liability of Corporate Shareholders, Officers, and Employees," NBA
Magazine. March 1990.

   K' This  information was obtained through an informal survey of hazardous waste generators and commercial
hazardous waste management facilities during the preparation of this report.

   31 For example, see "Avoiding Risks by the Acre," Nation's Business, May  1990, pp. 49-51.


 includes having an understanding of how and where they managed previously generated wastes,
 their current involvement in any Superfund sites, their potential cleanup costs associated with
 RCRA, and their compliance with other environmental laws.  In view of the potential for
 corporate liability and the financial liabilities connected with purchasing contaminated properties,
 it is not uncommon for corporations to spend $125,000 or more conducting an environmental
 assessment of a high-risk property that it wants to purchase, such  as a manufacturing facility or a
 chemical company. This expense is viewed as a form of insurance against unexpected future
 liabilities that can range in the many millions of dollars.32

       Most companies surveyed have no general policy on how to deal with properties that they
 are interested in purchasing but that have environmental problems.  These transactions are
 handled on a case-by-case basis. Companies may elect not to purchase the property, especially if
 the potential liabilities are high relative to the value of the property. In other cases, the property
 must be brought into compliance with environmental laws before completing the transaction.
 Sometimes the buyer may negotiate arrangements where the seller retains liability, such as
 splitting the property, with the  seller retaining title to the portion of the property with
 environmental  liabilities.  Corporations generally have mixed policies with regard to selling
 properties. For some, sales procedures are driven by the requirements of the buyer. Others
 routinely conduct audits of properties they intend to sell and clean them up before sale.

       Surveyed corporations report that  they have undertaken numerous cleanups that were not
 specifically mandated by state or federal authorities.33 These may have been conducted as part
 of a real estate transaction, to avoid being listed on the NPL, or to avoid potential problems with
 state or local governments.  Except for small, "non-reportable" spills that are cleaned up every
 day, large corporations indicate that they almost always will report cleanup activities  to state
 agencies, particularly if there is groundwater contamination or a potential threat to groundwater,
 and will clean the site according to state requirements. Some companies reported  that they  may
 not undertake cleanups unless state agencies have a "sign-off."  In addition,  having  the state
 agency sign off on the cleanup makes their properties more marketable. If buyers  find out that a
 property has been cleaned up in the past,  they often want a copy of the government sign-off.  If
 there is no sign-off, they expect an explanation and want to know if the government agency
 would sign off on the cleanup at the present time.  There is no reason for a buyer to take an
 uncompensated risk on whether the property is clean enough.  Without additional compensation,
 buyers are reluctant to take the risk that a property is sufficiently  clean. Thus, some companies
 consider undertaking a non-reported cleanup to be unwise. These findings are preliminary, and
 information used came from a limited number of corporations.  A formal survey involving a
 more significant number of corporations would supply data for a more in-depth  and quantitative
   32 Chemical Week. February 7, 1990, p. 14.

   33 This infonnation was obtained through an informal survey of hazardous waste generators and commercial
hazardous waste management facilities during the preparation of this report.

Waste Minimization

       The Hazardous and Solid Waste Amendments of 1984 established as a national goal the
minimization of the generation and disposal of hazardous waste. Because of the difficulty of
crafting workable regulations for the myriad and changing production processes used by
American industry and the difficulties inherent in even measuring the extent of waste
minimization, EPA has not pursued a  regulatory strategy for waste minimization to date
(although it has collected information on waste minimization activities through various regulatory
permit processes and through surveys).  Instead,  EPA's strategy has been to promote voluntary
waste minimization by industry through providing information and technical assistance to waste
generators.  Through its outreach programs, EPA also provides technical assistance and guidance
to state waste minimization programs.

       Beyond these efforts, a number of regulatory programs have created strong incentives for
industry to voluntarily reduce waste generation.  RCRA, through its stringent design, operating,
and treatment standards and its cleanup, closure, and post-closure requirements, has significantly
raised the cost of waste disposal, thereby creating strong incentives to reduce the generation of
wastes in the first place. Additionally, the potential long-term financial liabilities resulting from
the Superfund liability standard  and the public relations problems connected with reporting large
emissions under the Title III program  create further incentives for firms to  minimize the
generation of wastes and to reduce environmental releases below levels allowed by conventional
regulatory requirements.  A recent survey conducted by EPA of hazardous waste generators from
many different industries found  that the costs and the attendant long-term financial liabilities of
waste disposal were major factors leading firms to establish waste minimization programs.34

       Currently, there is no comprehensive set of information available  on the number of firms
that have developed waste minimization programs or the reductions in volume of waste
attributable to waste minimization efforts. However, while only a small number of major
corporations were surveyed, most have indicated that they instituted corporate-wide pollution
prevention and waste minimization programs.35 For example, large corporations and
commercial hazardous waste management firms reported that industries across the country are
devoting substantial resources to pollution prevention and waste minimization activities. There is
a growing corporate awareness that these projects often are profitable to pursue in their own

       Waste minimization projects historically have been initiated through efforts to improve
product yields and to reduce the cost of raw materials.  More recently, waste minimization has
become a primary objective of projects and a part of formal corporate policy.36 An EPA study
   M "A Profile of Hazardous Waste Generation and Waste Minimization in 1986," prepared for EPA, Office of
Solid Waste, January 1991.

   35 This information was obtained through an informal survey of hazardous waste generators and commercial
hazardous waste management facilities during the preparation of this report.

   36 Although the reduction and recycling of wastes is inherently plant- or process-specific, a number of generic
approaches have been used successfully to reduce many kinds of industrial wastes. They can be grouped into four
major categories: inventory management and improved operations, modification of equipment, production process


of waste minimization projects reported in the literature found that waste minimization can be
profitable, with over 80 percent of the cases examined having payback periods of three years or
less.37 Corporations also report significant cost savings from pollution prevention programs.
For example, 3M completed almost  1,900 projects that reduced the annual discharges of about
110,000 tons of air pollutants; 13,000 tons of water pollutants; 260,000 tons of sludge, of which
18,000 tons were classified as hazardous; and 1.6 billion gallons of waste water.38  As a result,
3M saved about $292 million from reduced manufacturing costs and from reduced investments
and operating expenses for conventional pollution controls. DOW Chemical reports saving about
$28 million from small waste reduction programs.39 The potential for cost savings even is
incorporated in the acronym for DOW's waste minimization program, WRAP — "waste reduction
always pays."

       Companies contacted in an informal survey for this report noted that they and other
companies have extended waste minimization efforts to nonhazardous wastes, because they are
concerned that nonhazardous industrial landfills could be the next generation of Superfund
sites.40 Thus, nonhazardous wastes are targeted under some companies' waste minimization
programs and have specific reduction goals.  Wastes that are classified as nonhazardous also may
be treated or incinerated at RCRA Subtitle C facilities because of liability concerns, rather than
disposing of them in industrial landfills.

       There are many examples  involving specific industrial  processes for which waste
minimization has resulted in significant cost savings.  For example, use of a water-based
electrostatic paint system instead of a conventional organic solvent paint  system improves the
quality of application,  decreases "down time" from 3 to 1 percent, reduces the generation  of
aromatic waste solvent and paint sludge  by about 95 percent,  and reduces personnel and
maintenance costs by about 40 percent.41  Use of an electrolytic metal recovery cell  to recover
copper from waste  generated in the  production of telephone switching equipment resulted in  a
higher-quality product, generation of about $2,000 per year in revenues from sales of recovered
copper, and a saving in disposal costs of about $4,000 per year.42  The Department of Defense
has developed a new process for stripping paints from military aircraft that both requires less
time and generates less hazardous waste than conventional wet paint-stripping processes.  The
changes, and recycling and reuse. See Waste Minimization: Environmental Quality with Benefits. EPA, Office of
Solid Waste and Emergency Response, October 1987.

   y Waste Minimization. Volume 1, EPA, Office of Solid Waste and Emergency Response, October 1986, p. 6.

   * Serious Reduction of Hazardous Waste. Office of Technology Assessment, September 1986, p. 7.

   39 Financial World, op. cit.. p. 42.

   * This information was obtained through an informal survey of hazardous waste generators and commercial
hazardous waste management facilities during the preparation of this report.

   41 Waste Minimization: Environmental Quality with Economic Benefits, op. cit.

   42 Ibid.


process uses small plastic beads that are air blasted at the aircraft's surface to remove the paint
by abrasion.43

       The Title III reporting requirements also have spurred efforts by companies to reduce
releases of toxic substances to the environment.  An example of this is Monsanto's recent
announcement of a goal of reducing toxic emissions by 90 percent in four years as a reaction to
discovering that the 20 million pounds of toxics released to the air in 1987 would have to be
reported under Title III.44 Monsanto developed a program under which it examines the
emissions reported under Title III, identifies projects for  changing industrial processes, if
necessary, and reviews operations and available control technologies. The company already
reduced emissions by  17 percent in  1988 through a combination of process changes, recycling,
and more efficient product-recovery systems.  Similarly, Polaroid has announced a five-year plan
to reduce the amount of toxic chemicals used and wastes  generated by 50 percent.45

       The aggregate effect of waste minimization on the generation of hazardous waste is
difficult to ascertain, given available data.  An EPA survey of hazardous waste generators in
many different industries gives a general picture of waste minimization practices over a one-year
period.46  The "Generator Survey" found that in 1986, approximately 80 percent of the  16,572
facilities surveyed were currently  implementing waste minimization programs.47 In quantifying
the reduction in hazardous waste  generation, the survey analyzed the changes in generation per
waste stream per facility. Respondents to the Generator  Survey identified a total of 78,800
wastes generated, and indicated that in 1986, source reduction activities were implemented for
17,600, or 22 percent of these.48 Complete data on the quantity of hazardous waste generated
in 1985 and 1986 were reported for approximately 12,000 of these 17,000 wastes.  For various
reasons, only 44 percent (5,301) of these wastes experienced an actual reduction in  hazardous
waste generation.49 Adjusting by  the level of the facility's production or activity (the index was
determined by the facility itself) corrects for one of the factors that affects the quantity of waste
generated.  Of the 9,100 facilities reporting quantity and production data, 49 percent (4,808)
experienced a decrease in the adjusted quantity change.  Table 2 shows the decrease in wastes
   «  Ibid.

   44  Financial World, op. cit., p. 43.

   45  Ibid.

   46  "A Profile of Hazardous Waste Generation," op. cit; Evaluation of Measures Used to Assess Pollution
Prevention Progress in the Industrial Sector, prepared by EPA, Office of Pollution Prevention, January 1991.

   <7  "A Profile of Hazardous Waste Generation," op. cit.

   4(1  "An Assessment of Methods," op. cit.

   49  Reasons suggested for lack of progress in source reduction are (1) the results of the activity were not realized
in 1986; (2) the source reduction activity was not successful; (3) some factor other than source reduction (such as an
increase in production) caused the absolute level of waste generation to increase; or (4) there were problems with the
reported data.


generated due to pollution prevention measures.50 On average, the waste streams that were
subject to pollution prevention activities were larger than the waste streams that were not,
leading to the conclusion that facilities generally target the largest wastes for pollution
prevention, or that the largest facilities (those with the greatest waste generation) were those that
implemented pollution prevention programs.51

                                           Table 2
                           DECREASE IN WASTE GENERATION
Type of
Number of
Total Decrease
  NOTE: Analysis includes only those wastes that did not change in toxicity.

      a. Wastes that underwent source reduction that reported quantity data.
      b. Wastes that underwent source reduction that reported quantity and production index

  Source: Evaluation of Measures Used to Assess Pollution Prevention Progress in the Industrial Sector, prepared
  for EPA, Office of Pollution Prevention, January 1991.
       Information collected by the Chemical Manufacturers Association for a sample of 211
firms for the period 1981-87 gives a general indication of trends in hazardous waste generation
on a facility level. The total volume of hazardous wastewater generated by these plants
decreased by about 19 percent.  The volume of solid wastes generated declined by about 42
percent.  This reduction in waste generation occurred in spite of increased production of the
chemical industry generally.52 Given the increased emphasis placed on waste minimization and
pollution prevention programs by industry during the last several years, it is likely that we will
continue to observe a downward trend in the generation of hazardous wastes.
   50 A significant portion of the Assessment of Methods study concerns the difficulties with using quantitative
measures to assess progress in pollution prevention.  For example, the net change in total quantity of hazardous waste
generated from 1985 to 1986 was 0.02 percent. Simply reporting aggregate waste minimization statistics masks the real
progress made with the 5,300 wastes reported in Table 2.

   51 Ibid.

   K 1987 CMA Hazardous Waste Survey. Chemical Manufacturers Association, July 1989.


                         EFFECTS ON SMALL BUSINESS CREDIT

       There is some concern that lenders may be restricting the flow of credit to small
businesses that are involved with hazardous substances or whose property may be contaminated
with hazardous substances.53  Typically, small businesses have limited assets to pledge as
collateral against loans, except for property. Because about 60 percent of new small businesses
fail within the first five years of operation, it is important to lenders to have small businesses
pledge property as collateral  for loans.54  However, foreclosing on such loans, as lenders often
must do, may place the lender at risk as an "owner."  Without up-front  environmental
investigation, this may make lending to businesses involved with hazardous substances relatively
risky. That is, banks can protect themselves by conducting environmental audits as a condition of
the loan, periodically throughout the term of the loan, or before  foreclosure.  However, in cases
where the cost of an audit is  high relative to the loan amount, the cost  of credit to small
businesses can be raised significantly. Additionally, the cost of environmental audits may present
a greater financial burden to small businesses when buying and selling property.  On the other
hand, in  a recent survey of small manufacturers conducted by the National Association of
Manufacturers when respondents were asked to "select accurate statements about their company11
three percent said they had "been declined for a new/renewed loan based upon the bank's
perception of their environmental liability problems."  The survey was sent to  8,500 small
manufacturers with a 27 percent response. The number of employees in 72 percent of the
companies ranged from 25 to 200.55

       Experts representing lenders  have testified before Congress, claiming that such help may
transform the lender into  an  "operator," thus expanding the lender's risk beyond the amount of
the loan.  However, under CERCLA, lenders are not considered owners or operators (are not
liable) when they hold property primarily to protect their security interest,  and do not participate
in the management of the facility.
   " The material in this section is based on prepared statements of Sally B. Narey, General Counsel for the U.S.
Small Business Administration, and of Charles M. Mitschow for the American Bankers Association at the Hearing on
"Lender Liability Under Superfiind" before the Committee on Small Business, U.S. House of Representatives, August
3, 1989.

   54 Ibid.

   55 The NAM Small Manufacturing Survey. National Association of Manufacturers, March 1991.



       Federal agencies involved in lending or foreclosing on property have also become
concerned with Superfund-type liabilities. The Small Business Administration (SBA) currently is
the target of a state suit regarding a foreclosed property and has at least one foreclosed property
on the NPL. The SBA has an inventory of over 60 sites where it has acquired potentially
contaminated property through foreclosure and an inventory of about 80 sites where it has
abandoned its interest in the property to avoid potential cleanup liabilities.56 The problem
exists for other government lending agencies or agencies that may foreclose or otherwise take
title to properties, such as the Federal Deposit Insurance Corporation, the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, the Farmers Home
Administration, and even the Internal Revenue Service. Recently, the Resolution Trust
Corporation has voiced concern that the presence of contaminated properties in the loan
portfolios of failed thrifts may raise the cost of dealing with the savings and loan problem.
     Ibid., statement of Sally B. Narey.


       Companies that have been listed as Potentially Responsible Parties (PRPs) at Superfund
sites have turned to their insurance companies as another source of funds to help pay for the
personal injury, property damage, and cleanup costs resulting from the contamination problem at
those sites.  Some of these insurance  coverage cases are massive. For example, "DuPont is suing
more than 50 domestic insurers, several underwriters at Lloyds of London, and more than 50
foreign insurers" over coverage for the cost of cleaning up 12 hazardous waste sites.57
Westinghouse is suing more than 140 of its insurers, and there are similar suits involving
Monsanto and  North American Phillips Corporation.58

       The  courts seem to be fairly evenly split regarding whether old insurance policies were
meant to cover the kind of contamination problems addressed in the Superfund program.59
However, insurance industry representatives have asserted that, regardless of the legal aspects of
the situation, the industry could not have anticipated the financial exposures they potentially are
subject to today when writing property and casualty polices years ago and, further, that they have
not accumulated the reserves necessary to cover those potential claims.60 More litigation
between insurance companies and PRPs presumably may ensue as  more NPL sites are addressed
and as state programs  require more cleanups. In addition, experts predict that litigation between
insurers and reinsurers involving the same cases now being litigated between PRPs and insurers
is expected to increase significantly.61  Although there have been calls for developing
mechanisms (other than the courts) for resolving the financial claims of PRPs against their
insurers as a means of reducing the transactions costs of the process, little as of yet has  happened
in this regard.62

       The  insurance industry essentially stopped writing environmental impairment liability
(EIL) insurance in the early 1980s, along with many other forms of high-risk property and
casualty insurance.  Since then, there  has been an ongoing debate about what precipitated this
insurance crisis. EPA  has conducted  extensive research on this issue and has found that the
general contraction in the availability of property and casualty insurance resulted from the
"insurance cycle."  Insurers offered policies at low rates to obtain premiums that then could be
reinvested at high market rates of interest. This cycle was exacerbated by extraordinarily high
interest rates in the late 1970s. When market rates of return dropped and insurers began to
suffer large  losses because  they had adopted unsound underwriting practices, their reserves
   51 Business Insurance. December 11, 1989, p. 3.

   58 Ibid.

   59 See Leslie Cheek III, "Insurability Issues Associated with Cleaning Up Inactive Hazardous Waste Sites," in
Integrating Insurance and Risk Management for Hazardous Waste. 1990.

   60 Ibid.

   61 "Surge Predicted in Reinsurance Litigation," Business Insurance. June 4, 1990, p. 18.

   42 Leslie Cheek III, op. cit.


contracted, limiting their ability to offer insurance coverage.  Reinsurers also suffered large losses
because they engaged in similar behavior. This led the industry to pull back from the more risky
lines of property and casualty insurance, to reduce the amounts of coverage available, and to
impose larger deductibles in policies. This is a typical reaction of the insurance industry when its
reserves contract and has been observed often in the past as the industry progresses through
fairly regular insurance cycles.63

       The industry contends that the joint and several aspect of the Superfund liability standard
makes it difficult to predict the industry's potential financial exposure.64 The industry also has
voiced concerns that the courts could imaginatively expand the coverage of policies beyond what
they are intended to cover and that, in the current atmosphere of changing and ever more
stringent regulatory requirements, it is difficult to predict with any kind of assurance the financial
liabilities they may face.*5

       Some insurance companies never left or have reentered the EIL market. And some
insurers who are not in the EIL market may occasionally write such coverage at the request  of
favored customers, though the extent to which this may occur is not well known. However, only
a small number of insurers offer broad pollution coverage. American International Group, Inc.,
and Reliance Group Holdings, Inc., dominate the "broad coverage" EIL market.  Other insurers
offering broad-coverage EIL insurance include: the Environmental Protection Insurance
Company (a risk- retention group), Federated Mutual Insurance Company, and St. Paul Fire &
Marine Insurance Company.**

       Although the broad-coverage EIL market is growing slowly and no new entrants are
expected this year, existing insurers have expanded the range of products offered, and coverage
for environmental consultants and contractors is now being offered.67  Also, Environmental
Compliance Services offers a policy for hazardous waste processors that covers the cost of
cleaning up the policy holder's property. (Most policies cover only third-party damages.)68 In
contrast to the broad-coverage EIL market, the EIL market for underground storage tanks has
expanded rapidly, in large measure because of EPA's financial responsibility requirements for
tank owners. As of 1989, at least five insurers and two risk-retention groups were offering such
coverage, three states had EPA approval for state funds to provide such coverage, and 38 more
states planned to develop such funds.69

   61 Proposed Policy Superfund Response Action Contractor indemnification 54 FR 46012, October 31. 1989.

   64 Hazardous Waste: Issues Surrounding Insurance Availability. General Accounting Office, October 1987.

   * Ibid.

   46 "EPA Tank Rules Spawn Separate EIL Market," Business Insurance. November 20, 1989.

   67 Ibid.

   * "Policy Covers Pollution Cleanup Costs," Business Insurance. September 11, 1989.

   69 "EPA Tank Rules," op. cit.


       Insurers in the EIL market generally use EPA's regulatory standards as a baseline for
environmental management standards and are active in terms of working with the insured facility
on managing environmental risks to prevent losses.  According to Lynne Miller, president of
Environmental Strategies Corp., "Pollution can be underwritten; it just can't be underwritten the
way it was (by many insurers) in the early 1980s."70 Insurers active  in today's market limit
coverage to specific sites and use comprehensive environmental assessments to determine the
nature of the environmental risks being insured.  Insurers typically will require that a risk
assessment be prepared for the site, along with recommendations for reducing potential
exposures.71  This is a positive development, as the environmental performance of the insured
facility is likely to be improved through the process of obtaining insurance.  In addition, these
insured facilities must  ensure full compliance with environmental regulations not only for legal
reasons, but in order to obtain or retain adequate insurance.

       Though broad-coverage EIL insurance is available, the coverage tends to have high
deductibles and to be limited to specific, well-run facilities that are in compliance with
environmental regulations. It is also perceived to  be expensive for the coverage offered.  EIL
insurance is and always has been offered on a claims-made basis. This type of insurance covers
only claims that are made during the policy period or within a limited period after the policy is
terminated. Thus, a business may maintain coverage against environmental liabilities only as long
as the insurance policy is  kept in force. This is different from the occurrence-based
environmental coverage offered (explicitly or unintentionally) under comprehensive general
liability (CGL) policies that were issued years ago, and that are now often the subject of
litigation.  Under those policies, an insurance  company would cover any incident  that occurred
during the period the policy was in force, even if it did not manifest itself or cause damages until
long after the policy was terminated. To avoid the long-term financial exposure connected with
occurrence-based policies, insurance companies now write CGL policies with absolute pollution

       Because of the costs involved in obtaining EIL insurance and the limits in coverage, it is
speculated that many companies are either operating without insurance or are self-insuring.71
This places additional burdens and responsibilities on corporate risk managers.  Indeed,
corporate risk managers have become  acutely  aware of risks (in the  financial sense)  from
environmental problems through their experience with Superfund sites and  underground storage
tanks.74 Experts on corporate risk management predict that risk managers will spend much
more time in the future on risk evaluation and loss control than on making  financial
arrangements to purchase insurance.75  This development, in addition to expected growth in the
   70 "Pollution Risks Insurable: Consultant." Business Insurance. October 30. 1989.

   71 Ibid.

   n Hazardous Waste: Issues Surrounding Insurance Availability, op. cit.

   73 Conversations with insurance brokers, large corporations, and commercial waste management companies.

   ?J "Pollution Exposures Getting Closer Look," Business Insurance. November 20. 1989.

   75 "Pollution Called Top Worry," Business Insurance. September 23, 1989.


EIL market as insurers gain more experience in writing such policies, could have favorable
effects by reducing the occurrence of unintentional releases of pollution to the environment.
Further in-depth research and analysis would provide information about the extent to which the
insurance industry is responding to the needs of the hazardous waste businesses in the face of a
change in higher compliance, waste minimization, and a change in corporate behavior.


Programs Affecting Hazardous Waste Management Practices

       The major statute that directly affects ongoing hazardous waste management practices is
RCRA and its 1984 amendments.  In addition, CERCLA and Title III also influence waste
management practices.  Apportioning the contribution of RCRA, CERCLA and Title III to the
effects on waste management practices may not be possible and is certainly beyond the scope of
this report. Instead the report provides a general discussion of the potential effects of each

       RCRA imposes design and operating standards for all hazardous waste treatment,
storage, and disposal facilities, with additional requirements applied to land disposal units.  For
example, the RCRA amendments require virtually all hazardous  wastes to be treated to reduce
their toxicity and mobility before being disposed of in or on land. This has increased the typical
costs of disposing of hazardous wastes in landfills from about $45 to $50 per ton in 1980 (i.e.,
pre-CERCLA), to about $60 to $180 per ton in 1990.76  This targe increase in disposal costs has
created a significant incentive  to reduce the amount of wastes generated.

       Under Superfund, joint and several  liability can be imposed on generators who send their
wastes to disposal sites, even if the wastes were managed at the time according to state-of-the-art
engineering and legal standards. Avoiding  the risk of such liability creates a further incentive to
reduce the generation of wastes. Further, to reduce the risk of future liability it behooves waste
generators to ensure that transporters operate in accordance with current safety regulations and
that commercial waste management facilities consistently comply with RCRA.77

       The preliminary findings show that CERCLA may also contribute to causing lending
institutions, insurers, and federal lenders, such as the Small Business Administration,  to become
more concerned with the waste management practices of firms with whom they do business.
Lenders, such as banks, pension funds, or other financial institutions, have a  financial interest in
ensuring that a company's current waste management practices (in addition to  past problems) do
not create  future liabilities that could compromise their investments. Property and casualty
insurers who continue to write environmental impairment liability insurance limit their own
financial exposure from contamination incidents  that may require large cleanup expenditures or
that could  result in damages to third parties (toxic torts) through policy exclusions, by limiting
the facilities covered and the period of coverage, and by requiring as a  condition of the policy
that the insured be in compliance with federal and state environmental regulations.
   76 Survey of Selected Firms in the Commercial Hazardous Waste Management Industry: 1984. Update, prepared
for EPA, Office of Policy Analysis, September, 1985; and 1990 Survey of Selected Firms in the Commercial
Hazardous Waste Management Industry, prepared for EPA, Office of Policy Analysis, October 1991.

   77 The potential for individual corporate officers or shareholders to be held personally liable under environmental
statutes provides corporations with further incentives to comply with environmental laws. See Albert M. Cohen, op.
cit., p. 29.


       The interests of hazardous waste generators, lending institutions, and insurers have been
piqued because these entities are increasingly concerned about potential liability, loss in property
value, and possible related cleanup costs. Because of these business concerns, Superfund liability
may be indirectly affecting hazardous waste management practices. That is, hazardous waste
management firms must maintain a good compliance record that meets state and federal
regulations in order to attract customers, acquire loans, and obtain insurance.

       Title III of the Superfund amendments requires companies to report inventories of
specific chemicals used on site and releases of toxic substances to the environment. The process
of collecting the required information has made companies more aware of the volumes and
sources of environmental releases.  The adverse publicity associated with reporting large releases
and with being on the infamous list of large emitters has led many companies to establish
programs to reduce their environmental  releases. In response to Title III, the Chemical
Manufacturers Association, whose members account for over 90 percent of the industry's output,
adopted a code of management practices under the "Responsible Care" program to reduce
chemical releases to all media.78

Environmental Assessments of Commercial Waste Management Facilities

       The findings in this section are preliminary and can be used to develop hypotheses about
the effects the Superfund liability standard has had on commercial waste management practices.
From information provided by experts during informal interviews conducted in this study,  it is
apparent that the practice of environmental audits is increasing in a effort  to avoid potential
liability.79 A more in-depth survey could be conducted to test hypotheses with quantitative
analysis about the effects the Superfund liability standard is  having on this  industry.

       Clearly, the stringent regulations  developed under RCRA have been the primary force in
changing waste management practices of generators and waste management companies. But the
federal and state Superfund  programs and Title III also have improved waste management
practices. This section focuses on the indirect effects  these programs have had on waste
management practices. The findings and conclusions presented in this section were drawn from
an informal survey conducted for this report of a small number of hazardous waste generators
and commercial waste management facilities, unless otherwise noted.

       Some major "Fortune 500" companies began auditing the commercial hazardous waste
management facilities to which they sent wastes on a sporadic basis in the mid-1970s, as RCRA
began  to  take hold.  With the passage of CERCLA in 1980 and the reauthorization of RCRA in
1984, the group of companies that conducted audits of commercial facilities expanded, but
auditing still was not routine. As the implications of Superfund became more clear, the use of
auditing programs by major companies increased considerably. By 1985, most large companies
had instituted comprehensive audit programs under which they audit annually (or in some cases
every six  months) the commercial hazardous waste management facilities to which they send
   78 Conversation with the Chemical Manufacturers Association.

   79 This information was obtained through an informal survey of hazardous waste generators and commercial
hazardous waste management facilities during the preparation of this report.


wastes.80 It is also standard operating procedure for hazardous waste management companies
to audit the facilities of specialized firms to which they send some wastes.  These business
practices serve as indirect enforcement for assuring compliance with federal and state
regulations.  Small companies have been slower to establish dedicated audit programs. Because
auditing is an overhead function and places additional demands on staff and resources, financially
troubled or small companies may choose not to incur such costs.

       From the limited information gathered  for this report, it seems that most companies'
audit programs are run by their headquarters' environmental staff.  According to surveyed
companies, the facility audits vary from being fairly cursory to extensive, taking from one to
several days.  Corporate audit teams, consultants, or single  individuals may be used to conduct
the audit. Large companies often use outside auditing/engineering firms due to manpower
constraints.  Occasionally several companies that share a geographic area will band together and
form a consortium for the purpose of hiring consultants to audit all waste disposal companies
within a reasonably accessible geographic area.  Facility audits usually include a review of the
facility's records and compliance status, a review of federal  and state records for the facility, a
walk-through of the facility, an examination of the facility's  waste handling procedures, a  review
of the facility's groundwater monitoring system, and an assessment  of the financial strength of
the company and  its insurance coverage.

       Some companies in the survey still allow individual plants to contract independently for
waste management services.  However, they indicated that the  trend is toward centralization of
control, with some large companies having centralized their operations as early as  the 1970s.
Most large companies now use company-wide, centralized purchasing of waste management
services and allow the use only of audited and approved facilities.  This allows them  to limit the
number of sites at which they potentially are exposed to Superfund liability in the future. Major
corporations surveyed indicated that they prefer dealing with large, technically competent,
permanent, and financially secure  companies, but they will use the services of smaller firms to
handle specific wastes or to service plants in  remote locations. Small generators are often  not as
knowledgeable about potential Superfund liabilities or as careful in the selection of waste
management facilities as major corporations. In general, however,  all  generators appear  to be
more cautious regarding waste management because of the  Superfund liability standard.

       RCRA has likely been the major  force in changing waste management practices.  But
based on the initial findings of this report, the use of facility audits by customers of hazardous
waste management facilities, spurred in part by Superfund liability concerns, has possibly
enhanced compliance with RCRA. All commercial  waste management companies must answer
to their customers - if they cannot answer  questions about compliance problems, they run the
risk of losing customers. Facility audits are a sort of pseudo regulatory force that operates
through commercial leverage and  has made the industry more  RCRA-compliance oriented.  For
example, some commercial facilities now tend to have better recordkeeping and materials
analysis than  required by RCRA.
   80 For example, see Gregg Easterbrook, "Cleaning Up," Newsweek. July 24, 1989, pp. 39-40.



       In the commercial hazardous waste business, indemnification refers to a pledge of assets
 by the commercial facility to secure its customer against potential liabilities resulting from
 environmental problems that could arise from the operation of the commercial facility. Some
 commercial hazardous waste management companies offered to indemnify customers well before
 the passage of CERCLA. However, as noted by surveyed companies, more customers now seek
 indemnification, and it is standard for major corporations to request it, to the extent that
 indemnification was found to have become a standard practice of the industry.  Depending on
 the company and the nature of the agreement, the assets at risk in indemnification agreements
 may include those of the parent corporation. Although smaller firms may offer indemnification,
 it is not of great practical value, given the  amount of their assets compared to the potential costs
 involved in Superfund cleanups.

       However, some commercial waste management companies indicated that they do  not
 offer indemnification, because they believe their customers are more concerned about being able
 to remain in compliance and to continue handling routinely generated wastes. Generators
 contacted in the informal survey said that they also pay close attention to the financial  stability of
 smaller  hazardous waste management companies, in addition to their compliance record.
 Generators need assurance that such facilities will have the financial strength to remain operating
 in an environmentally sound manner and to meet the regulatory requirements imposed by
 RCRA,  especially the closure requirements.

       Commercial  hazardous waste management companies themselves have expressed  concerns
 about the  future cost of the  indemnification agreements into which they have entered.  Beyond
 the need to stay in compliance with federal and  state regulations, these agreements create an
 additional incentive  to companies to operate their facilities in an environmentally sound manner
 and avoid long-term contamination problems. Commercial hazardous waste  management
 companies already have major internal programs for conducting waste management and
 environmental audits of their own  facilities as a  means of ensuring that the practices are  in
 compliance and meet the demands of their customers for environmentally sound practices.

 On-Site Versus Off-Site Management of Wastes

      The influence of  Superfund in decisions concerning on-site versus off-site waste
 management has been mixed.  On  balance, Superfund probably has driven more generators  to
 use off-site commercial facilities, rather than to  continue managing wastes on site.  As noted by
 surveyed firms, these companies have pursued a business strategy of centralizing their purchases
of waste management services to limit their potential liabilities and of adopting pollution
 prevention and waste minimization programs. On the other  hand, to the extent that corporations
 have the requisite expertise and facilities, many  have decided to manage wastes on site to
eliminate the  risks from joint and several liability created by Superfund, though they still  will
 remain subject to RCRA's requirements. Furthermore, economies of scale in treatment have led
generators of large volumes  of wastes, particularly aqueous wastes, to manage them on site.

Nonhazardous Wastes

       In RCRA, hazardous wastes are defined as "characteristic" wastes or as "listed" wastes.81
Wastes not falling in these two categories are considered non-RCRA or nonhazardous wastes.
However, the current distinction between hazardous waste under RCRA is continually subject to
change upon the introduction of new data and review. Given changing standards and testing
procedures, it is possible that wastes currently considered to be nonhazardous under RCRA may
be classified as hazardous in the future.  Therefore, under Superfund's strict liability standard,
firm's found responsible for contributing these nonhazardous wastes to the site may be liable at a
later  date when these wastes are determined to be hazardous.

       The interviewed hazardous waste generators and commercial hazardous waste
management firms indicated that this situation makes some firms (primarily the larger
corporations) quite conservative when disposing of wastes that are considered to be
nonhazardous today. The firms reported that they routinely send some of their nonhazardous
waste to hazardous waste facilities, in large measure because of Superfund. Companies view the
additional  cost of RCRA premiums for disposal of nonhazardous waste as a form  of insurance to
protect against future losses related to liability.

       These firms also expressed concern that groundwater may become contaminated at
substandard industrial landfills or  at other nonhazardous waste facilities. Groundwater
contamination from industrial landfills and surface impoundments could be a significant
environmental problem in the future.  There are  about 20,700 industrial facilities (2,800
industrial landfills, 15,300 surface  impoundments, and 2,600 construction/demolition debris
landfills) across the  United States.82 Data collected at sites with groundwater monitoring
systems in  place (approximately 2,200 facilities) indicate that there are contamination problems
at about  25 percent of them.83


       Companies always have been concerned with the potential  liabilities connected with
transporting wastes, and this did not change with Superfund. The  major concerns  are with tort
liabilities and public reaction to specific incidents. There has been a great improvement in the
performance of transporters over the last decade, but surveyed facilities viewed this as resulting
primarily from the Department of Transportation's (DOTs) insurance requirement and EPA's
   81 "Listed" wastes are wastes that are explicitly listed by EPA as hazardous in 40 CFR 261. "Characteristic" wastes
are wastes that exhibit the characteristics of ignitability, corrosivity, reactivity, or EP toxicity.

   82 Nonhazardous Waste: Environmental Safeguards for Industrial Facilities Need to Be Developed. General
Accounting Office, April 1990, summarizing data collected in response to requirements in the 1984 amendments to
RCRA.  EPA's data collection efforts produced the following documents: Summary of Data on Industrial Non-
Hazardous Waste Disposal Practices (Dec. 1985), Census of State  and Territorial Subtitle D Nonhazardous Waste
Programs (Oct. 1986), Screening Survey of Industrial Subtitle D Establishments (Dec. 1987), and Report to Congress:
Solid Waste Disposal in the United States (vols. I and II, Oct. 1988).

manifest system, rather than from the Superfund liability standard. The insurance requirement
appears to have weeded out most of the "fly-by-night" haulers.

       Many companies contacted indicated that they conduct audits of the transporters they use
frequently. Such an audit would include a review of EPA and DOT permits, insurance coverage,
a visit to the facility, review of equipment, and examination of driver training and capabilities.
When using transporters for a one-time situation, such as a medium to large remedial action,
cost and availability are the major factors in determining which transporter to use.  In these one-
time cases, companies generally would not check much more than the EPA, DOT, and state
permits.  In general, generators indicated a much greater concern about the disposal sites to
which wastes  are sent because of the potential for long-term liabilities, than with the
transportation of those wastes.


       The federal Superfund program has created in a short time a large and increasing
demand for environmental services, including consulting, chemical analysis, engineering,
treatment technologies, and audits.  The  related cleanup programs of other federal agencies and
states, along with the increasing amount of cleanup activity being undertaken in the private
sector as an  indirect effect of such programs, has added significantly to the demand for
environmental services.

       The environmental services industry is comprised of a number of different sectors.
Within those sectors, many firms are small and privately held.  Data are not yet collected by the
federal government that would allow an accurate characterization  of the size of the industry and
the trends in its growth over time.  However, enough information  is available from a variety of
industry publications and studies to develop a general idea of the size and the recent
performance of the industry.  Clearly, the environmental services industry has experienced record
growth in the past decade, and this growth is expected to continue into the  next century.84
Environmental regulations, especially CERCLA and RCRA, are the primary forces fueling this
explosive growth. Unfortunately, the data are not available that make it possible to determine
the contribution different  regulatory programs have made to the growth in the environmental
services industry.

       Estimates of revenues in 1989 for the environmental services industry range from about
$50 to $180 billion dollars.85  A recent study by Enviroquest (San Diego) estimated overall
revenues in 1989 for twelve sectors of the environmental service industry to be about $120
billion.86 The company projected the industry's growth rate to be about 12 percent a year,
which  means that revenues could nearly double by 1995.  Revenues of the three sectors most
affected by hazardous waste regulations were estimated to approach $25 billion:

  o    Hazardous waste management: Revenues were estimated  to be about $13 billion.
       Although this sector's growth has slowed somewhat,  annual growth rates were still
       projected to be high, in the range of 15-20 percent a year.

  o    Environmental consulting and engineering:  Revenues were estimated at about $10 billion
       and are expected to increase at a rate of about 10-15 percent a year.
   84 An EPA survey of the hazardous waste industry indicates that there have been increases in demand for the
following waste management services: the incineration of solids and sludges; various site remediation/field services
(remedial cleanups, underground storage tank (UST) cleanups, drum management, mobile treatment, and lagoon
closures; waste minimization consulting services; and various pretreatment technologies, like sludge de-watering and
waste stabilization and solidification. See "1986-1987 Survey of Selected Firms in the Commercial Hazardous Waste
Management Industry," EPA, Office of Policy Analysis, March 31, 1988.

   85 See Environmental Business Journal. April 4, 1990; and Chemical Week. October 11, 1989.

   86 The sectors comprising the industry include: analytical services, solid waste management, hazardous waste
management, asbestos abatement, water infrastructure, water utilities, environmental consulting and engineering,
resource recovery, instrument manufacturing, pollution control equipment, diversified companies, and conglomerates
(firms where only a small percentage of the revenue comes from environmental services).


  o    Analytical services sector: This is one of the smallest industry segments, but is expected
       to be the fastest growing over the next five years. Revenues were estimated to be about
       $1.8 billion.

       A summary of the estimated revenues and growth rates for these three industry sectors is
shown in Table 3.
                                         Table 3
Industry Segment
Hazardous Waste
Env. Consulting/
Analytical Services
Publicly Held
Privately Held
Source: Environmental Business Journal. Enviroquest, Inc., April 1990.
       There are no available statistics on the number of employees in the environmental
services industry. However, industry publications indicate that there has been significant growth
in employment, and that the growth in demand has caused firms to aggressively search for skilled
employees and to raise significantly compensation and benefits. According to a 1989 survey
sponsored by the American Consulting Engineers Council, the average salary increases for
employees at all levels in environmental firms were far greater than those of their counterparts in
the construction industry or in industry in general.  The survey also found that an unusually high
number of employees are eligible for incentives, and that over 30 percent of firms have improved
their benefit programs in the last year.  The survey covered companies specializing in hazardous
waste disposal, analytical services, and environmental engineering.87

       In the past decade, the environmental services industry has experienced a substantial
amount of entry by new firms, expansions into the industry by firms in related businesses, and
consolidations through mergers.  There also has been significant reduction in the number of
   87 Engineering News Report. November 30, 1989.

 hazardous waste land disposal facilities (mostly small, substandard facilities) resulting primarily
 from the stringent design, operating, monitoring, and financial responsibility requirements
 imposed by RCRA.  This has resulted in an industry that has an improved environmental
 performance and that is financially stronger.

       Many firms that operate hazardous waste facilities are now branching into the hazardous
 waste cleanup industry, and firms in different industries, especially chemical manufacturing, are
 expanding into environmental services.  DuPont, for example, is participating in at least 10
 environmental business activities, from consulting to plastics recycling.88 Industry experts expect
 the merger  and acquisition activity that occurred in the industry in the  1980s will continue, and
 the industry will continue to consolidate in the 1990s. Some mergers and acquisitions have
 involved European firms in anticipation of more stringent hazardous waste  regulations being
 imposed in  Europe.  U.S. firms reportedly also are examining possibilities for entering European

       It is difficult  to document precisely the growth that has occurred in the environmental
 services industry over the last decade or what portion may be contributed to Superfund.
 Information developed using a comprehensive directory of environmental services firms compiled
 by Environmental  Information, Ltd., indicates that about 39 percent of the consulting/engineering
 firms with main or branch offices located  in a sample of 14 states opened for business in the past
 decade. Firms that already were established before 1980 also  grew considerably -- they opened
 over 141 branch offices in these states.  The same high rate of growth is evident for the spill
 response/cleanup industry.  About 40 percent of these firms were opened in the past ten years.
 There ajso was substantial entry from firms that were in business in related areas.  About 22
 percent of the firms  now in the spill response/cleanup business expanded from related

       The exceptional growth and projected continued growth in the environmental services
 industry has been reflected in the price/earnings ratios for stocks traded on  the major exchanges.
 Many environmental services stocks sell at price/earnings ratio of 15 to 25, with a few reaching as
 high as 30.  Industry analysts believe that these companies will be fairly immune to economic
 cycles. Recently, several investment companies have introduced mutual funds specializing in the
 environmental services field.  The major drivers for industry growth are expected to be the
 Superfund cleanup program, RCRA's corrective action program, state programs, increased
 funding for  cleanups at federal facilities, and a large amount of environmental assessment and
 cleanup activity  in connection with real estate transactions.90
   u "Know How Cleans Up," Chemical Week. May 2, 1990, p.30.

   89 The states included in the sample were those with 25 or more Superfund sites: CA, FL, IL, IN, MA, MI, NJ,
NY, OH, PA, TX, WA, and WI.

   90 See: Chemical Week. October 11, 1989; Business Week. October 16, 1989; and Engineering News Report.
January 25, 1990.



       This report's focus was on Superfund's indirect effects.  However, it should be noted that
a variety of other federal and state programs have also created incentives that indirectly affect
the private sector. Other federal programs include RCRA and the Community Right to Know
Program under Title III of the Superfund Amendments.

       RCRA has imposed stringent design, operating, and treatment standards that have
increased significantly the costs of managing hazardous wastes and that have created strong
financial incentives to reduce the generation of wastes. RCRA also has a corrective action
component requiring that a facility subject to a RCRA permit must commit to clean up
contamination at the facility as a condition of the permit or an administrative order.91  Potential
buyers of properties with RCRA permits have an interest in determining the potential financial
liabilities associated with such sites. Buyers of industrial property and lenders who finance such
transactions need to determine whether the property has RCRA problems associated with it and,
if so, the potential financial impact of those problems.

       The Title III program has two primary functions:  first, it mandates emergency planning
in most communities, and second, it gives communities the right to information regarding the
hazardous substances used and emitted by certain industries.92  Title III requires facilities to
report information on the volume of hazardous materials used on site and on the annual releases
of hazardous materials into the environment. Public interest in environmental issues has grown
in the last decade, spurred by such events as Love Canal, Times Beach, the James River, and
Bhopal.  Companies can expect to run into significant public reaction if the threat of hazardous
substances is thought to be present. Recently, some investor groups have rated companies
according to their environmental track record. Companies with poor records could expect to
attract fewer investors, which could reduce stock values.*3 Thus, this program has induced firms
to reduce their  legally permitted emissions of toxic substances to avoid  the public relations
problems inherent in reports of large volumes of such emissions. A recent example is
Monsanto's announced program to voluntarily reduce its toxic emissions by 90 percent over four

       The federal Superfund program has influenced states to  develop programs patterned after
it. Because many of these state superfund programs have liability provisions that have been
interpreted by the courts in the same manner as the federal Superfund  liability standard, states
may impose financial liabilities on private parties for contamination at sites that are not on the
NPL.  Though the current capabilities of state hazardous waste/cleanup programs vary
   91 RCRA requires anyone who operates a hazardous waste treatment, storage, or disposal facility to obtain a
permit. A condition of RCRA permits is that existing contamination problems must be cleaned up according to
federal standards.

   92 Title III does not apply to federal facilities.

   83 Superfund Report. February 9, 1990, p. 9.

   94 Financial World, op. cit., p. 43.


 considerably, and only a handful of states have accounted for most of the non-NPL/non-RCRA
 cleanups, state cleanup programs could expand considerably in the future. Additionally, states
 recently have enacted a variety of property transfer laws (e.g., New Jersey, Connecticut, Illinois,
 and Indiana) that require sellers to identify - and in New Jersey and Connecticut to clean up --
 contamination  as a condition of the transfer of certain types of property.

        Clearly, property owners and potential buyers must be concerned with the future
 marketability of their property in light of the current potential for incurring environmental
 liabilities and the possibility of evolving regulatory  requirements.  In November 1990 at a District
 of Columbia Bar Association meeting, David J. Hayes of Latham & Watkins stated that the first
 rule in a property transaction is to "know what you're buying," warning that, "if you close your
 eyes, you'll jeopardize your ability" to use the innocent land owner defense.95

        Finally, .firms must consider potential liabilities associated with the threat of lawsuits
 alleging damages to third parties who may have been exposed to hazardous substances.  These
 "toxic torts" pose the threat of protracted litigation, large legal bills, and huge damage awards
 (through either court settlements or court orders).  In our conversations with industry
 representatives, they expressed increasing concern over the potential for such litigation.
 Although this type of liability may have a significant effect on industry's environmental policies
 and behavior, a thorough discussion of this topic is beyond the scope and focus of this report.
   * "Summary of Developments -- Investigation Benefits Outweigh Risks in Land Transactions, Attorneys Say,
Toxics Law Reporter. November 28, 1990, p. 840.