Understanding Environmental Site Assessments

What is an Environmental Site Assessment?

An Environmental Site Assessment (ESA) is a comprehensive review of the environmental conditions at a specific property. ESAs are a valuable resource for property owners, lenders, real estate attorneys, land developers, and insurance companies that are used to identify and evaluate potential contaminants on the site. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) imposes strict liability on landowners for the cleanup of hazardous materials on their property, regardless of fault. CERCLA provides “outs” from strict liability as long as all appropriate inquiry (AAI) has been completed. Typically, the impetus behind completing a Phase I ESA in the first place is to obtain thisinnocent landowner defense.

The ESA process identifies potential environmental concerns that could lead to costly cleanups and is a critical piece of due diligence for anyone with a vested interest in the land, including insurance underwriters. It is important to note that ESAs are only a snapshot in time, and they are generally only recognized as valid for three months. So although insurance underwriters will review them, they don’t tend to over-rely on their conclusions, especially when they are outdated or not compliant with the latest version of the ASTM-standard. In this article we’ll discuss everything you need to know about the types of environmental site assessments, why they’re needed, and when underwriters may want them to properly evaluate an account.

Why are Environmental Site Assessments Necessary?

In 1980, the passage of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) created a federal “Superfund” to pay for the clean-up of accidental spills, as well as uncontrolled or abandoned hazardous waste sites. It also granted authority to the US Environmental Protection Agency (EPA) to seek out those responsible for the releases and to ensure their cooperation in remediation, including cost recovery efforts.

In seeking out these potentially responsible parties (PRPs), the EPA can investigate both past and current property owners/operators for liability and reimbursement. Moreover, prospective purchasers may be similarly implicated if they failed to complete appropriate environmental due diligence before acquiring land. But what does “due diligence” mean and how can the requirement be satisfied in order to qualify someone as an innocent landowner instead of a PRP? In the 1980’s, these were not easily answered questions because there was no single standardized approach. Clearly there was a need to agree upon best practices in this new industry of performing what became known as Phase I Environmental Site Assessments (ESA’s).

Fortunately, the American Society for Testing and Materials (ASTM) created the first such standard in 1993, known as ASTM E1527-93 (the last two digits represent the year the standard was adopted).  It detailed the minimum sources of information to be reviewed, as well as what a site inspection should entail.  It also considered the format expected for these ESA reports.  After the adoption of the initial standard, it was quickly updated in 1994, with subsequent revisions made in 1997, 2000, and 2005.  The 2005 version is particularly noteworthy because it was the first standard to be explicitly recognized by the EPA as satisfying the requirement for completing “All Appropriate Inquiry” (AAI) in environmental due diligence. ASTM completed the most recent update of this standard in November 2021, with final adoption by the EPA expected in the Spring of 2022.

Environmental Transaction Screen (ETS)

Not everyone needs or wants an ASTM-compliant Phase I ESA, and for those parties, an environmental transaction screen may be more than adequate.  Intended as a screening tool for potential environmental concerns associated with commercial real estate, an ETS includes only a limited scope of work. This might include a site visit, a review of publicly available environmental records, an overview of historical information, and an interview with the site owner or occupant. Additionally, this scope of work need not be completed by an environmental professional but may be performed by the current or future user of the property. Because of these features, usually an ETS is only recommended for very low risk property types with readily available historical information.

Advantages:  Low cost, quick turnaround, unnecessary to hire a consultant to complete one

Disadvantages:  May miss important environmental hazards associated with a site, confers no Landowner Liability Protections under federal environmental law

Phase I Environmental Site Assessment

For those needing to demonstrate that they completed adequate due diligence before acquiring or transacting on commercial real estate, a Phase I ESA is the default approach.  The standard practices detailed in ASTM E1527 include all those required by an ETS, but they must be completed in greater depth and performed by an environmental professional. A key goal in this approach is to identify past releases or potential releases of hazardous substances at the subject property, as well as other recognized environmental concerns (REC’s). Because a Phase I ESA is non-invasive, requiring no onsite sampling of any kind, the identification of REC’s often results in a recommendation for obtaining a Phase II ESA.

Advantages: Meets All Appropriate Inquiry standards, can enhance turnaround time of underwriters

Disadvantages: More expensive than ETS, non-invasive so may miss or underestimate hazards present

Phase II Environmental Site Assessment

When a Phase I ESA identifies REC’s at a property, stakeholders will often opt for a Phase II ESA to be completed. By its very nature, this type of study is invasive. It may include subsurface borings, soil and groundwater sampling, geophysical testing for underground tanks or buried drums, sampling of dry wells or floor drains, etc. If the initial scope of a Phase II finds contamination above allowable parameters (also known as “actionable levels”), further study will be required to delineate its extent.

Advantages: Enhances certainty in determining sources and nature of contamination, which can help improve estimates of fair property value as well as how to best structure pollution insurance coverage

Disadvantages: Entails greater cost & time, may necessitate involvement of regulatory agencies, only as good as the scope of work so too few samples taken or insufficient parameters tested may miss contamination

Phase III Environmental Site Assessment

When a Phase II ESA identifies actionable levels of contamination at a property, a Phase III ESA will be needed to determine the full extent of impacts, both vertically and horizontally.  Such studies may include evaluation of pathways for movement of contamination in soil and groundwater, installation and regular sampling of groundwater monitoring wells, and engagement with the applicable regulatory authorities.  Such work is necessary prior to beginning remediation, so that all parties can agree on the best approaches for optimizing results while minimizing expenditures.

Advantages: Because regulatory review is integral at this stage, stakeholders have greater certainty that any remedial work is approved prior to undertaking it

Disadvantages: Regulatory standards change over time, meaning some work that was previously approved may no longer be considered adequate, possibly inviting “re-openers”

Insurance and Environmental Site Assessments

Although a obtaining an ESA is not a pre-requisite to applying for or obtaining pollution liability insurance, doing so can provide unique benefits to both the insured and the insurer. These benefits vary according to the type of report completed, as do the associated shortcomings. Because liability under CERCLA is strict, insurance carriers will closely examine the findings of available ESA reports when crafting Premises Pollution Liability (EIL or Site Pollution Liability) policies in order to limit their exposure to known conditions. Such limitations can put them at odds with insureds who want to protect themselves from liabilities associated with any identified issues.  However, by partnering with an experienced environmental underwriter, solid solutions for all parties can be readily achieved.

Please contact us if you have specific questions about environmental site assessments or if you would like to discuss an account opportunity.