On the morning of Dec. 25, the News Analysis on page A1 of the New York Times led off with this cheery holiday thought: “Sometime in the last couple of months, predictions of a major economic downturn or recession in 2019 went from being a crank view to the conventional wisdom.” At the front end of the Great Recession, we offered some ways in which businesses and others could protect themselves against environmental liabilities flowing from bad economic times. See “Anticipating Environmental Issues in an Economic Downturn,” Natural Resources & Environment, Vol. 24, No. 1 at 33 (Summer 2009). Many of those observations still hold.
Primarily, entities have often managed their environmental liabilities to clean up historic contamination or to maintain current compliance through agreements. Some may be direct: one party agrees to indemnify another party. Others may be indirect: the regulator agrees to seek compliance from one party first and the other party only as a backup. See “Managing Environmental Obligations: Tracking ‘Environmental Debtors,’” 35 Pa. L. Weekly 196 (Feb. 28, 2012), posted on this blog here.
Those arrangements collapse if the party with the environmental obligation cannot or will not perform due to other financial stress. The problem can be as simple as the new owner failing to pay the electric bill to power the pumps on a groundwater pumping system or allowing its housekeeping to lapse.
Now may be a time to inventory the environmental “debts” one is owed. If the debtor seems fragile, one may want to consider one’s options.
One option that is more common now is excess of indemnity insurance coverage. Rather than insist that that new owner somehow secure its obligations, you can insure against its default. It is a tool in the box if not new, then more commonly used, since 2009. Excess of indemnity approaches can insure over first-party performance obligations or more conventional third-party claims such as bodily injury and property damage causes of action. In cases where responsible parties have assumed cleanup obligations under a consent decree or administrative order on consent, the insurance can safeguard a prospective purchaser or lender from the risks associated with the responsible party’s default.