Environmental Indemnification: A Crucial Consideration in Property Transactions

When purchasing or leasing property for new or expanding business operations, some contamination from past activities might exist at the site. However, the new owner or operator should address the issue of indemnification in the purchase or lease documents to protect itself from being responsible for contamination caused by former owners or operators.

What Is Indemnification?

Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 42 U.S.C. § 9607 (1980), the potentially responsible parties, including past and present owners and operators, are responsible for remediating contamination at the site. CERCLA imposes both strict and joint and several liability, meaning the new owner or operator could unexpectedly have to pay for expensive remediation if the other potentially responsible parties are bankrupt or can’t be located. By negotiating an indemnification agreement, the new owner or operator protects itself by transferring the cleanup responsibility to the party who previously caused the contamination.

Agreement Types and Indemnification Language

When purchasing or leasing a property, the two most used contracts are a purchase sale agreement (PSA) or a lease agreement (LA). Both documents may contain important language addressing indemnification.

A PSA might address environmental indemnification issues between the buyer and seller in several sections:

• Cleanup/Remediation: If contamination is found at the site, this language specifies which party is responsible for the remediation and defines the standards for cleanup and future use of the site.
• Compliance with Environmental Laws: This language states that the new owner has an obligation to follow all environmental laws and reporting requirements when conducting activities at the site.
• Environmental Covenants: This language sets forth any ongoing obligations for environmental protections at the site, including engineering or institutional controls that must be maintained.
• Environmental Representations and Warranties: This language contains specific statements about the site's environmental condition, including compliance with environmental laws, the absence of hazardous substances or other pollution, or any past environmental violations.
• Indemnification/ Hold Harmless: This language sets forth the parties’ responsibilities to pay for the cleanup of any contamination caused by their operations during their time of ownership.
• Insurance Requirements: This language sets forth what types of insurance, including any environmental coverage, the new owner is required to carry and often mandates that insurance must be in place when the new owner or operator begins operations at the site.
• Termination and Default: If pollution-related violations trigger termination rights or default provisions, this language sets forth how the contract may be terminated if the pollution is not properly addressed.

Taken together, these sections of the PSA specifically set forth which party is responsible for remediation expenses at the site. In reviewing each section, ensure there is no contradictory language and be aware that your environmental obligation could be addressed in more than one section of the contract.

If the new party is not purchasing but is instead leasing the property, the lessee is also responsible for environmental contamination at the site as an operator under CERCLA. Therefore, the parties often enter into an LA, which contains similar provisions to a PSA, to protect the new operator by delineating who is responsible for past or future contamination. It is common for the lessee to indemnify the landowner for all contamination caused by the lessee, but the landlord should remain responsible for any historical contamination that occurred prior to occupancy.

If indemnification is not addressed in a PSA or an LA, the parties may enter into a separate indemnification agreement. This separate agreement, also called a “hold harmless agreement,” specifies that the purchaser and the seller agree to be responsible for contamination they caused during their ownership or operation. This agreement does not relieve the current owner or operator of liability, but it does require the party who caused the contamination to reimburse the innocent party for the costs it incurs to address the contamination.

These three documents—a PSA, LA or indemnification agreement—create legal obligations. Therefore, it is important to have your legal representative review all purchase or lease documents on your behalf.

Pollution Legal Liability Insurance

In some cases, indemnification is not addressed in the sale or lease transaction, the prior owner or operator is bankrupt or cannot be found, or perhaps the buyer's contractual obligation dictates that the new landowner assume the historical pollution liabilities. In these situations, the new owner or lessee can manage its acquired pollution liabilities via an insurance product called a pollution legal liability policy.

While the pollution liability marketplace cannot insure known contaminants, it can provide protection against unknown contaminants, migration of known contaminants, bodily injury and property damage associated with pollutants, and future operational pollution conditions. These transactional site pollution policies are typically written for five- or ten-year terms and customized to the site's contamination.

Understanding Your Obligations Is Critical

As a land purchaser or a site lessee, understanding your environmental obligations is extremely important. This understanding provides long-term financial protection against unexpected and expensive environmental remediation that, even though you did not cause, you must pay for by virtue of owning or operating at the site.

As a Hylant client, your risk management team includes environmental risk experts who can assist your project team with reviewing site assessments and contracts to identify risks. They will also design custom pollution insurance risk transfer solutions to protect your operation at each phase.

If you aren’t yet a Hylant client but you need help, contact us.

Related Reading: Navigating Environmental Risks When Establishing Start-up Operations

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.