New Phase I ESA Standard: Pollution Legal Liability Consequences

The American Society for Testing & Materials (ASTM) issued new specifications for conducting a Phase I Environmental Site Assessment (Phase I ESA), which became effective February 13, 2023.  

A Phase I ESA is the basis for underwriting environmental insurance submissions. These due diligence reports are fairly standard in real estate, mergers & acquisitions (M&A) and financing transactions. It is important to consider how these changes to the standard methodology for preparing these assessments may impact the pollution liability risk-transfer landscape. Changes were effectuated to avoid opportunity for bias and subjectivity in what otherwise should be a factual representation of a parcel’s operational history and potential for environmental impacts. 

Among several changes, the following key modifications have been included in the standard:

1. A broadened definition of Recognized Environmental Conditions (REC), including “likely presence” as a subjective, leaves a lot to the discretion of the authorship. There is already an innate bias basis to preparing these reports, given that they are often commissioned by either the buyer, seller or financial stakeholder involved in a real estate or M&A transaction and the consultancies commissioned to prepare the reports and conduct the analysis are incentivized to earn more work by recommending additional services. It is important to note that lawyers with deep and broad experience with pollution liability laws and regulatory structures should be engaged to make conclusions and concurrence with findings; and
   
   
2. The new standard allows for an optional review of emerging contaminants, including per- and polyfluoroalkyl substances (PFAS). This change formalizes and expands the consideration of emerging contaminants within Phase I ESAs. These “emerging contaminants” are substances that may not be categorized as hazardous under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) but might be considered hazardous under specific state or local regulations. Given the evolving regulatory landscape (especially with PFAS), this review could have significant implications that could affect due diligence assessments moving forward.

These developments in an evolving Phase I ESA preparation process, which affect the authorship and downstream users of these reports, are extra important to the site pollution liability industry at-large. Reasons go beyond the most obvious, that there need to be standards and checks and balances in place in order that an otherwise largely unregulated environmental engineering/consulting industry can strive to attain. Importantly, the environmental insurance industry uses the Phase I ESA to set a baseline for site conditions and identify, manage and allocate risks whether they be pre-existing, known or unknown pollution conditions. These conditions (although not necessarily RECs, HRECs or CRECs) can lead underwriters to make critical decisions about how to structure coverage grants and exclusions. Additionally, brokers have a duty to encourage (and even insist) that insureds be thorough and fully disclose any and all environmental documents to the insurer and schedule those as disclosed in order to not have the Known Conditions Exclusion or similar policy limitation apply. 

Lastly, confidentiality issues related to the transaction for which the Phase I ESA was conducted need to be considered. Often these reports and analyses are produced under attorney-client privilege (given there is a potential to trigger state or federal release reporting statutes). This has implications for “knowledge” with respect to the entity signing the reps and warranties clauses of the application for coverage.  

Changes to standards of engineering, science and environmental regulations are always controversial depending on the perspective of those affected. With respect to the impacts that these changes will have to users of the reports in the context of procuring pollution liability insurance, it is critical that an experienced and dedicated broker to this specialty be engaged early on as the transaction progresses to navigate how the reported conclusions and findings might impact coverage.  

Overall, these changes in the ASTM E1527-21 standard are likely to impact how environmental risk is identified, managed and communicated in commercial transactions, potentially making environmental considerations more significant for decision-makers evaluating transaction risks moving forward.

How Can Alliant Help?

Alliant Environmental brings a consultative approach, technical knowledge, practical know-how and breadth of experience to deliver expert advice and customized risk transfer solutions for a broad spectrum of pollution exposures and circumstances. Our dedicated specialists are focused on meeting the unique risk management and insurance needs of industry verticals, including private equity, M+A, construction, real estate, public entity, energy and marine, healthcare and agribusiness, among others. We understand that each exposure class and transactional framework has its own unique set of risks that, requires a technical focus and demands tailored, bespoke solutions.

Reach out today for more information: Bill Nellen