June 03

Long-Tail Environmental Liabilities; That’s Why You Bought Insurance

Written by Steve Henshaw, P.G., President & CEO, EnviroForensics
As seen in the June 2013 issue of Cleaner & Launderer


Last month over 200 active or former dry cleaners received a letter from the State of California informing them that if they would pay money to the State, the State would settle a claim against them for contributing to environmental contamination at a long closed out solvent recycling and waste management facility.  The drycleaners followed the law and sent waste solvent and filters to a hazardous waste management facility that was licensed by the State of California to handle such material.  As part of having a license to operate, this facility was required to have a cleanup bond to pay for the removal of stored material and the cleanup of environmental contamination at the site.   Should they shut down and walk away before such cleanup activities were completed.

While this particular situation seems unfair, I assure you that it is not uncommon.   Whether it is the government, or a neighboring property owner, or a new owner of the site, environmental liability does not go away.  Environmental contamination can lay dormant for years, even decades, but at some point, more often than not, it gets cleaned up and somebody has to pay for it.  And when somebody has to pay, even if that somebody is the government, those that owned or operated the facility that generated, transported or disposed of the hazardous waste, contributing to that contamination, can be held liable for the cost of investigation and cleanup.

Today I want to tell you once again about long-tail liabilities and how they won’t go away.  In fact, like taxes, the environmental statutes were written so that they would not be discharged or forgiven through a bankruptcy, ownership transfer, possibly even estate probate. 

I want to tell you this because there are steps that you as a business owner can and should take that could protect you from these long-tail liabilities.  If you don’t take these steps, you are gambling with your future, hoping the boogie-man doesn’t come and get you, always looking over your shoulder.  You didn’t work all your life to be looking over your shoulder, hoping that the craft and trade that you worked so hard to build does not cause you financial harm or ruin.

The most important thing to understand is that you need to take steps to protect yourself from potential long-tail claims.  These steps should be part of your estate planning, because they can protect you against legal action and financial hardships, even ruin.   I’m talking about getting your records organized.  These records include your old general liability insurance, old leases, solvent purchase and disposal information, major equipment purchases, business purchase agreements and information on the names and addresses of the people you bought your business from.

While most people hold records for at least seven years, because that is the statute of limitation for a tax audit by the IRS, that time frame doesn’t apply to long-tail liabilities.  You don’t need to be a hoarder and keep everything, but you need to keep key information.

Old insurance, common everyday general liability insurance, can in many circumstances be used to protect you and your business against environmental liability.  This is particularly true for policies written before 1986, when the absolute pollution exclusion language was written into policies.  Note however, that insurance laws are typically state specific and the courts change positions throughout time, depending on a number of factors.  That is to say that for your particular situation the law in your state today may be better tomorrow or may be worse tomorrow.  One thing is for certain and that is if you don’t have your old policy information, you don’t have any chance of the law helping you.

In addition to old insurance policies, the previous owners and operators of your business may have caused or contributed to the environmental problem.  I cannot think of a situation where one of my dry cleaner clients did not believe in his heart that the previous operator was not more responsible or at least equally as responsible for the environmental problem at hand.

While I don’t want to gang up on my friends in the equipment (dry cleaning machines, distillation units, misters, etc.) and solvent distribution side of the industry, the facts are clear that some older equipment has been determined to be responsible for the release of solvents to the surface and some distributors of drycleaning solvent caused a release of contamination to the surface.  Releases of solvents to the surface results in environmental impacts.  Each site and situation has its own fact pattern, but if you do not have any information as to the type of equipment or machinery you used or your predecessor used, or if you don’t know who supplied your solvent and who took your waste, you may be hard pressed to hold them accountable for your situation, should in fact they have some contributory liability.

So what kinds of records should I assemble and retain?

Insurance Records – Insurance records means any evidence of old insurance and would include: actual policies, certificates of insurance, endorsements, communications with your insurance brokers, insurance quotes and estimates, and cancelled checks for your insurance. If you find anything with a policy number on it, that may be very valuable.  If you cannot find the insurance information contact your old brokers and ask he or she to write a letter to you, describing the insurance that you bought from them (company name, type of coverage, coverage period, etc.).  Better yet, have them prepare an affidavit with this information (call me, I can share with you a sample affidavit).  I even recommend that you contact the insurance companies that historically insured you and your business and ask them for copies or any evidence of the insurance you had with them, (e.g. type of insurance, years, policy numbers, policy limits, excess coverage, etc.).

Historical Ownership and Operation Records – Historical ownership and operations records are those records that retrace the history of the property ownership and the use on that property.  These records would include any information that can show names or addresses (past or present) of individuals or businesses that owned the property or the business that may have contributed to environmental contamination on the property (or at another site such as a hazardous waste management facility, landfill, etc.).  These records would include, purchase and sale agreements, their old insurance records and files, old leases, mortgages or business loans, waste disposal records, and equipment manuals.

Equipment and Supplier Records –The records that you should look for and retain regarding your old suppliers and vendors would include, but not be limited to, equipment receipts for drycleaning machines, distillation units, filtration systems, misters, solvent purchases, and solvent and filter disposal.  Retain old manuals, warranties and certificates.  Keep copies of old checks or accounting records showing these purchases.  Keep correspondences of any information regarding supplying or disposing of solvents and any information associated with the safety of such information.

With respect to your recording keeping, think about the type of information you wish you had if one day you receive a letter from the government or from an attorney saying your business has caused or contributed to environmental contamination.  The cost to respond to such a claim is expensive, but the cost of investigation or cleanup could financially ruin you.  If you have old records you could save yourself, your family and everything you worked so hard to build.  Because records you keep could be discovered during a litigation, you should talk to your attorney, or an environmental attorney, to see if you should keep your records or if perhaps they should keep your records.  If an attorney has your records, there is a better chance that they can be kept confidential and privileged should litigation and discovery ensue.  If you cannot find your old insurance, insurance archeology companies like PolicyFind may be able to find your old policies or evidence of insurance coverage.  They will gladly answer your questions honestly and have helped more drycleaners find their insurance than any other company in the world.

In summary, finding and safely securing and storing your old insurance and business records is an essential part of estate planning.  Writing down a summary of the historical operations and business ownership today is crucial because we forget things over time.  If you can’t find old insurance records getting a letter or an affidavit from your broker(s), stating what insurance they sold you (particularly before 1985), can often times be used as proof of insurance.  Finally, if you cannot find your old insurance a skilled insurance archeology company may be able to find policies or evidence of insurance coverage.