A PRELIMINARY REPORT ON THE INDIRECT EFFECTS 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 CD C\J •'QUARTERS LIBRARY ------- PREFACE 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program, the data and analyses to support such claims have frequently been either too limited, potentially biased, or outdated.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 INTRODUCTION 1 EFFECTS ON PROPERTY TRANSFERS AND CLEANUP ACTIVITY 5 Buyer and Lender Liability 5 Environmental Assessments 6 Responses by Lenders and Purchasers to Environmental Problems 9 EFFECTS ON CORPORATE BEHAVIOR 14 Mergers and Acquisitions 14 Waste Minimization 16 EFFECTS ON SMALL BUSINESS CREDIT 20 CONCERNS OF FEDERAL LENDING AND INSURANCE AGENCIES 21 EFFECTS ON THE INSURANCE INDUSTRY 22 EFFECTS ON WASTE MANAGEMENT PRACTICES 26 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 EFFECTS ON THE ENVIRONMENTAL SERVICES INDUSTRY 32 APPENDIX: OVERVIEW OF SELECTED FEDERAL AND STATE ENVIRONMENTAL PROGRAMS ------- INTRODUCTION 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 so. 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. 1 ------- 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 discharges. 4 See Financial World. January 23. 1990, p. 41. 5 The NAM Small Manufacturing Survey. National Association of Manufacturers, March 1991. 3 ------- 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. 4 ------- EFFECTS ON PROPERTY TRANSFERS AND CLEANUP ACTIVITY 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 ENVIRONMENTAL PROBLEMS UNCOVERED BY ENVIRONMENTAL ASSESSMENTS AT INDUSTRIAL AND COMMERCIAL SITES Problem Asbestos Contaminated surface or groundwater Underground storage tanks Hazardous substances in general Leaking underground storage tanks Soil/ground contamination PCBs Chemical spillage Improper waste disposal Lead in paint Radon Formaldehyde Contaminated drinking water Indoor air quality problems Other Don't know % Reporting Problem 49 33 30 23 19 13 12 5 4 3 3 2 1 1 10 9 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 agencies.21 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. 10 ------- CHART 1 Incidence of Environmental Audits and Problems Associated with Commercial and Industrial Loans j 100% 70% 100% 80% 60% I 40% o O =5 20% •3 # 0% All C&l Loans Receive Audits Source Mortgage Banker Envionmertal Survey. Shugol Research and Jsfle Associates. Noverrte 1066 percentage of all C & I Loans 13% 7% Problems Found Corr. Action Needed :;:::!?:1I:-^ Effect on Loans When Environmental 32% 22% Terminated Restructured Proceed Sauce: Mortgage Barker Ervrormertei Sirvey, Shugd Research and JaBe > Nt»errt», 1969 46% 11 ------- 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. 12 ------- 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, I 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 transactions. 13 ------- 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. 14 ------- 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 analysis. 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. 15 ------- 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 right. 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 16 ------- 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. 17 ------- 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. 18 ------- 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 AS A RESULT OF POLLUTION PREVENTION ACTIVITIES (1986) Type of Measure Actual Adjusted Number of Wastes 5,301' 4,808b Total Decrease (tons) 9,716,874 10,860,453 Median Decrease (tons) 6.3 4.0 Median Percent Decrease 37% 26% 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 data. 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. 19 ------- 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. 20 ------- CONCERNS OF FEDERAL LENDING AND INSURANCE AGENCIES 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. 21 ------- EFFECTS ON THE INSURANCE INDUSTRY 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. 22 ------- 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. 23 ------- 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 exclusions.72 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. 24 ------- 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. 25 ------- EFFECTS ON WASTE MANAGEMENT PRACTICES 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 program. 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. 26 ------- 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. 27 ------- 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. 28 ------- Indemnification 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. 29 ------- 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 Transportation 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). Ibid. 30 ------- 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. 31 ------- EFFECTS ON THE ENVIRONMENTAL SERVICES INDUSTRY 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). 32 ------- 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 $1.8 billion. A summary of the estimated revenues and growth rates for these three industry sectors is shown in Table 3. Table 3 1989 REVENUES OF SELECTED ENVIRONMENTAL INDUSTRY SEGMENTS ($MM) Industry Segment Hazardous Waste Management Env. Consulting/ Engineering Analytical Services Publicly Held Companies # Co's 25 20 7 Total Rev $3,774 $2,592 111 Privately Held Companies # Co's 2,000 6,400 $1,600 Total Rev $8,900 $7,600 1,700 Estimated Total Revenue $12,700 $10,200 $1,800 Projected Annual Growth Rate 17% 17% 20% 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. 33 ------- 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 markets. 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 businesses.89 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. 34 ------- APPENDIX OVERVIEW OF SELECTED FEDERAL AND STATE ENVIRONMENTAL PROGRAMS ------- 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 years.94 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. A-2 ------- 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. A-3 ------- |