Handling waste means managing environmental risk

Waste management companies face increasing challenges. Heavily regulated and scrutinized, they face numerous environmental risks that could lead to government enforcement actions, fines or even criminal penalties—not to mention third-party liability. Fortunately, just as risks have grown, so have risk‑management tools, including novel legal strategies and advanced insurance products.

Industry veterans are no strangers to the many risks companies face: transportation accidents, site releases, legacy contamination from prior land uses and nuisance claims, to name a few. Nor are they strangers to their consequences: regulatory enforcement actions, cleanup obligations and litigation. But recently, new risks have appeared, including so-called emerging contaminants, such as per- and polyfluoroalkyl substances (PFAS). And unlike many legacy contaminants, PFAS pervade waste streams, being found in consumer products, coatings, packaging, textiles, wastewater residuals, landfill leachate and even protective gear. For waste management companies, the ubiquity of PFAS has injected new risks into nearly all operations. 

While these risks are daunting, they are not insurmountable. Commensurate with this rise in risk has been an expansion of risk management options that not only address these risks but also present potential opportunities for companies willing to avail themselves of these options.

Sources of risk

Environmental liability in the waste management industry rarely stems from a single dramatic event. Instead, it arises through routine operations, infrastructure aging or historical conditions that were never fully evaluated and addressed.

Legacy contamination is a core concern at decades‑old facilities. These issues surface during transactions, refinancing, expansion or redevelopment, creating uncertainty that drives purchase price adjustments and burdensome indemnities and can even kill deals entirely.

Transportation and storage of waste also are sources of liability: hauling accidents, mishandling of waste, tank leaks and other containment failures all being potential risks.

Contamination migration presents risk beyond facility boundaries. Migrations can affect neighboring landowners, aquifers or surface waters. These scenarios often lead to disputes over responsibility that are costly and difficult to resolve.

When it comes to government oversight, agencies have broad authority to require investigations, corrective action, long-term monitoring and cleanup—even when contamination was not caused by the operator or where the operator complied with permits at the time of the release. Regulators are increasingly requiring evaluation of PFAS in leachate, groundwater and wastewater residuals.

Contractual indemnities are another source of risk. Operators often assume such risks in their contracts with others, sometimes even unknowingly. For example, a broad indemnity could sweep in environmental liabilities despite not explicitly referencing them.

Finally, private litigation often could unfold on a large scale when dealing with issues like drinking water contamination. These claims often involve allegations of property damage, but they could even involve claims of bodily injury. As we have seen with PFAS, waste management companies are being pulled into mass tort litigation based on their alleged role in contaminating groundwater.

Managing risk: Knowledge is power, or is it?

Too little knowledge invites surprise liabilities. Unmanaged knowledge, however, invites other forms of surprise—for example, the inadvertent and unknowing triggering disclosure duties. Companies are well-advised to develop fact-finding procedures that strike the correct balance, ideally with the assistance of a combination of legal and technical advisors to preserve privilege.

For owned facilities, environmental assessment is the first step. However, discovering previously unknown contamination can trigger reporting and costly remediation and compliance obligations. One way to address this conundrum is to avail oneself of the state’s audit privilege act (which exists in most states). These acts allow operators to conduct environmental audits that, if done correctly, provide insulation from state penalties.

Property purchasers inadvertently could assume environmental liabilities. Assessing site conditions, therefore, is essential. Properly scoped Phase I environmental site assessments (ESA) are essential to obtaining knowledge and innocent purchaser protection under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA. While typical Phase I ESAs do not check for PFAS, other assessments do. As for more invasive forms of investigation, factors often lead buyers to adopt a more balanced approach—this includes seller resistance to testing on one hand and the assurances gained by performing “all appropriate inquiries” under CERLCA.

Managing risk: Operations

Environmental policies and response plans directly reduce risk. Operators that do not have them need them. Those that do have them should perform regular audits with the aid of legal and technical advisors to keep pace with evolving regulations. These reviews should address permitting, spill response, operating and safety protocols, training, maintenance schedules and other technical plans. Documentation is equally important. In enforcement actions and insurance disputes, contemporaneous records often determine outcomes.

Managing risk: Contractual allocation

Corporate transactions are risky; buyers could acquire contamination and liability, while sellers could retain liability after a sale. Parties should carefully allocate risk and negotiate representations and indemnities. Risk allocation indemnities and environmental representations often are heavily negotiated. Because indemnities depend on indemnitor solvency, parties also are wise to consider insurance as a backstop (discussed later).

Operational contracts can preallocate environmental liability and set operating protocols. As it relates to PFAS, waste facility operators, as well as transporters, should consider standard PFAS provisions that allocate liability or prohibit specified PFAS. Although the latter could be practically unfeasible given PFAS’s ubiquity.

Managing risk: Insurance

Insurance is a powerful risk-transfer tool—if deployed thoughtfully. Modern general liability (GL) and commercial auto policies tend to include pollution exclusions. Specialized environmental insurance fills the gap: Pollution legal liability (PLL) for site-based exposures, and contractors pollution liability (CPL) for work at third-party sites. These policies are highly customizable, which is a strength and a risk if not negotiated precisely. For legacy issues, the toolkit broadens, and decades-old GL policies could be viable sources of coverage.

Historically, GL policies covered third‑party injury and property damage, including pollution. Since the 1970s, however, GL policies have included various forms of pollution exclusions. Because insurance policies are contracts interpreted according to state law, the law applicable to the policy and policy language idiosyncrasies dictate the extent to which pollution exclusions apply. Some states, for example, do not apply pollution exclusions to certain product-use scenarios (think certain PFAS applications). For waste operators, however, the story could be different.

PLL and CPL policies exist to address pollution events from nearly all angles. The existence of a “pollution condition” triggers coverage for cleanup (including voluntary cleanup if optioned), third-party bodily injury and property damage, business interruption and natural resource damages if elected. These policies can cover pre-existing and new contamination. They can even cover known contamination when carefully negotiated by environmental counsel, insurance counsel,\ and a skilled broker. For PFAS specifically, some carriers categorically exclude PFAS, but many are willing to include PFAS coverage where due diligence quantifies the risk.

Pollution coverage is not an off-the-shelf proposition. The highly customizable nature of pollution coverage readily can result in unseen gaps in coverage. Moreover, changes in operations over time can render programs outdated. Risk managers continually must test their programs for weaknesses. For particularly large and/or complex operations, it could be worth having environmental counsel and insurance counsel coordinate to perform a risk audit to ensure the risks environmental counsel identifies find a home in the company’s coverage. In transactions and real estate deals, site-specific PLL policies can even be deployed to shift risks where indemnities alone are insufficient or purchase price-constrained.

Common pitfalls for pollution coverage include (i) PFAS-specific exclusions or indirect PFAS bars via broad product-related carveouts; (ii) broad known-conditions exclusions not limited by constituent, medium or area; (iii) operational restrictions that impede anticipated work; and (iv) sublimits, per-claimant deductibles or regulatory-trigger limitations that reduce practical value. These pitfalls, however, easily are avoidable with a proper understanding of the company’s risk and the policy terms being proposed to address them.

For legacy liabilities, historic GL coverage also could be an option. Earlier GL policies often had limited or no pollution exclusions. So, depending on facts and governing law, historic GL could respond to current claims based on historic contamination. Assessing this avenue is its own task requiring coordination between environmental counsel to identify the risk and insurance counsel to tie risk to policy.

Poor claims-handling practices, too, can jeopardize coverage. For claims-made PLL policies, “first made and reported” requirements are enforced strictly. Operators should give timely notice and, when in doubt, seek coverage advice—ideally as soon as a claim is made or a loss occurs. Disputes over timely notice of claims often turn on what constitutes a claim and when it was first made. Be alert to demand letters and similar communications that could constitute “claims” and track notice deadlines. For cleanup costs, follow notice/approval protocols and use “emergency response” carve-outs where available to effect preapproval response actions. For business interruption losses, confirm waiting periods and keep contemporaneous records to substantiate time-element losses. Fortunately, with careful attention to detail, every claims-handling pitfall can be avoided.

Managing risk: Liability divestiture 

In some cases, transferring risk is not enough. Environmental liability buyouts can resolve known contamination through fixed-price remediation or assumption arrangements that eliminate open-ended exposure. These types of risk transfers can be useful when contamination makes a sale or redevelopment difficult because they provide certainty for buyers and sellers.

More recently, liability divestiture has emerged as a transformative option. Specialized asset managers acquire legacy liabilities—including PFAS liabilities—in exchange for cash and insurance. These transactions allow operators to permanently remove liabilities from their balance sheets. Operators who are interested in this avenue rigorously should investigate and understand the liability and offsetting insurance and work with legal and technical advisors to ensure the best deal.

Building a proactive, integrated risk strategy

For waste operators, environmental risk is inherent but manageable. PFAS is only the most recent example of broader trends toward expanded scrutiny and long-term liability.

The most effective risk management strategies are layered and integrated. Environmental counsel, insurance counsel, consultants, brokers and technical experts each play a role. A comprehensive approach—combining diligence, operational controls, contracts, insurance and liability divestiture—provides the greatest flexibility and protection.

The goal is not always eliminating risk; sometimes it is enough to merely understand and control it. With proactive planning, informed investigation and a multidisciplinary approach, waste operators can navigate even the most complex risks with confidence.

Mary Simmons Mendoza, Greg Van Houten, Andrew P. Van Osselaer and Victor K. Salazar are with the law firm Haynes Boone, an American Lawyer top 100 law firm. It has more than 700 lawyers in 20 offices around the world, providing services for more than 40 major legal practices.