Managing an Environmental Crisis: Legal Issues, Liabilities, and Managing Risk

In the course of an environmental crisis, environmen­tal legal liabilities and regulatory re­sponsibilities arise and must be man­aged to attempt to minimize the risk of financial loss to the company in crisis and to preserve any rights or opportunities that may exist to recover cleanup costs and legal defense costs. Legal counsel will play an important role in advising the company in the course of developing strategy and tactics in responding to the environmental release or spill itself and in reacting to asserted and potential legal claims by government agen­cies and private individuals and entities.

Several critical issues must be consid­ered when an environmental crisis occurs:

Prepare For a Crisis Before It Occurs. To reduce the risk in the first place of a re­lease, good management practices should be developed to reduce the chances of a spill. Of course, all regulatory requirements gov­erning spill planning and spill prevention should be met. A plan as to who you will call in terms of legal counsel, an emergency response contractor, an environmental con­sultant, and a public relations firm should all be thought through and a plan prepared so that if the crisis arises, that plan goes into effect and all in-house and outside profes­sionals are contacted and put on the job to help the company manage the emergency.

Is the Government There to Help You? The practical answer is they are probably there to force you to respond to the release or spill, or threaten to take action and charge you a lot more money than you would spend if you did it yourself. It is important to keep in mind that the regulatory requirements that will be discussed below must be com­plied with, and therefore government agen­cies will need to be convinced in the short and long-term that you are complying with emergency response regulations.

Regulatory Compliance Is a Two-Edged Sword. The regulatory requirements generally consist of requirements relating to preventing a re­lease and actions re­quired once a release occurs. Reporting of a spill is something that should be ad­dressed within the statutory or regulatory deadlines. Follow-up written reports should be carefully prepared and submitted. The timeliness and content of reporting can be used against a party in any future govern­mental and private litigation, so care should be used in terms of the nature of these re­ports. It would be appropriate to have legal counsel review the reports before submitting them to the government. Compliance with regulations may affect the ability of a com­pany to recover for costs incurred in terms of any government fund, such as the federal Oil Spill Liability Trust Fund, or private in­surance policies.

What Happens After the Spill is Re­mediated? Often gov­ernment enforcement actions and private lawsuits are filed af­ter the remediation is complete or, at times, before it is complete. Government agencies may file claims against the party who owns or operates the facil­ity from which the spill or release occurred. Civil and criminal penalties may apply under both the federal and state statutes. If parties knowingly, or in some instances, negligently, caused the release, then the individuals in­volved may be criminally prosecuted and subject to imprisonment and fines. Com­panies can be criminally prosecuted for fines and remedial actions.

Recovery of Losses. Recovery of losses can be addressed in certain circumstances through submitting claims to governmental funds or insurance companies. For releases of oil, as an example, a claim could be sub­mitted to the federal Oil Spill Liability Trust Fund. One of our clients recovered millions of dollars from this Fund.

What Statutory Liabilities Can Be In­curred? A multitude of potential liabilities may be incurred from an oil or hazardous substance spill. First, the cost of remedia­tion and cleanup may be significant. Li­ability may arise from several state and federal statutes. Under the Oil Pollution Act (OPA) for example, the costs can be ex­treme. The OPA provides that the respon­sible party, such as an owner or operator of the facility from which the release occurred, can incur two types of liability: removal costs and damages. Removal costs are es­sentially the costs of removing the oil and remediating the property and water body. Damages include, among others, those to natural resources, such as to creeks, but also, according to the government, the effect on the ecosystem, such as the loss of the use of the affected area until it is restored or grows back, real and personal property, and lost profits or earning capacity because of injury to property or natural resources. For smaller companies, the cost of responding to an oil spill and cleaning it up can force the com­pany into bankruptcy. For mid-size firms, the impact can be significant.

What Private Claims Could Be Filed? Statutory or governmental obligations are unfortunately only the beginning of poten­tial losses. Landowners are the next level of concern. Private claims may include groundwater contamination claims, polluted property, destruction of crops and trees, and loss of economic profit from land or water ways. These claims can constitute as much or more of a loss than the statutory remedia­tion and natural resource type claims.

Manage the Release and Response in the Context of Potential Governmental and Private Claims. Legal counsel should be engaged immediately to assist in tactical and strategic decisions in not only how to manage the response in the context of regu­latory compliance, but also to assist in at­tempting to reduce or manage claims from the government and private parties. Un­derstanding and meeting insurance require­ments where the claims are covered by insur­ance is critical. Reporting obligations may be immediate under some policies.

In addition, involving the insurance company representative in the process to some extent may be required under the rel­evant policy.

Insurance—A Risk Management Tool Before the Spill. Many companies are not aware of or do not take advantage of environ­mental insurance. This may be a significant oversight to manage risk by these firms. En­vironmental insurance has now been around for several years. In my experience, compa­nies have suffered losses that easily could have been reduced by developing a corporate risk management strategy that includes environ­mental insurance. I have represented pipe­line companies, exploration and production companies, and marketing companies who have suffered significant losses because the insurance they had was insufficient to cover significant claims or was purchased in the context of one transac­tion for cer­tain assets, but no review was made of the purchase of insurance to cover other assets. In other cases, the policies were not negotiated to ad­dress the risks and conditions of the com­pany or its assets; as a result, the coverage in terms of policy amounts was insufficient to cover the loss. This is more common than one might think, in part because there seems to be a lack of awareness among many companies of the need for or the availability of environmental insurance coverage, and when such insurance is purchased, parties are not aware of or lack the expertise to in­terpret or negotiate the terms of the policy to ensure adequate coverage is obtained. Only specialized insurance brokers and attorneys are typically familiar with these policy issues and are able to assist the client in securing appropriate coverage.

Contribution Actions—Who Else Can You Invite to the Party? In respond­ing to and addressing a spill or release, it is important to manage potential evidence and gather evidence as time and events al­low to preserve claims that the firm may have against other individuals or entities. A particular release may be only in part from your company’s operations or facil­ity. You would want to develop the case to collect the appropri­ate portion of the loss from the party or parties whose opera­tions or facilities also contrib­uted to the release. The release may have been caused by faulty equipment, metal, piping, or instruments. Preserving such material or equipment is key to preserving your claim against the manufac­turer or supplier of the defective material or equipment.

Marshalling the Defense. On the oth­er hand, it is important to preserve evidence and develop your defense to claims from various parties. Private parties will likely as­sert negligence claims. Demonstrating the exercise of due care requires preserving and gathering of documents and information.

Preserve Documents and Evidence in Any Event—Don’t Make the Response Worse than the Event. It is important not to make the reporting or response worse than the event. Destruction of documents, emails, electronic files, or physical evidence may make matters worse. A little known provision of the Sarbanes-Oxley Act created new criminal provisions that cover commu­nications with a government agency during a government proceeding. If a governmental civil or criminal investigation is conducted, and false information is given to the govern­ment, individuals and their employers may be prosecuted under the federal Criminal Code—remember the Arthur Andersen case. Thus, care should be taken in what statements or documents are submitted to the government to address accuracy and completeness of those statements and corre­spondence. In private litigation, spoliation of evidence can result in the judge striking pleadings, defenses, and even the so-called “death sentence” where the jury is instructed to conclude you caused the harm, and the only issue is to evaluate damages.

Conclusion. For many businesses, the liabilities associated with an environmental crisis may be minimized through a measured plan of response. Having a plan for dealing with an environmental crisis, and having the professional capability to successfully imple­ment the plan, will factor heavily in the abil­ity of a company to manage, if not reduce, liabilities that may arise from the crisis.