Occupational Exposures and Risk Mitigation on Contaminated Land

The United States Environmental Protection Agency (USEPA) designates properties contaminated with pollutants as brownfield sites. (1)  These properties are often in desirable markets and have significant value when fully remediated and developed. In addition to federal regulation, many states establish programs that regulate the redevelopment of sites designated as brownfields. Based on the latest estimates by the USEPA, there are more than 450,000 brownfields in the US. 

Brownfield projects include risks at the remediation and the construction phases; both have risks and challenges. Failure to address these risks can affect the health of the workers remediating and developing the site and the investors’ bottom line. From the investors’ perspective, addressing the risk includes both contractual risk transfer to downstream parties and the procurement of adequate insurance coverage. This article will review the steps involved in a typical brownfield transaction and discuss a potential risk-transfer gap for bodily injury caused by a pollution condition. 

Once the investors decide to purchase and develop a brownfield site, they assemble a deal team. Deciding who is on the deal team requires coordination and strategy. Ideally, the deal team is comprised of individuals with varied expertise, including capital investors, development specialists and individuals designated to address the risks involved in brownfield development. 

Once the deal team is assembled, the team identifies a potential site if it has not done so already. The seller and deal team then agree to the terms of a sale via a letter of intent. When preparing the letter of intent, the deal team must be aware of and consider federal, state and/or tribal statutes and regulations that govern the letter of intent’s terms and conditions. 

The deal team then begins performing its due diligence investigation. Next, the team determines appropriate lot cover and develops a budget and timeline, including details about remediation. The team hires an environmental consultant to complete a Phase 1 investigation and report and conduct targeted sampling. The Phase 1 report should: 
  • Consider the historical use of the site
  • Review and summarize available government environmental records
  • Include details of visual site inspections.

An experienced environmental consultant should analyze the status of any specific environmental concerns, such as stained soils or the presence of underground tanks. 

Once the deal team receives the results of the Phase 1 inspection, it will decide whether a Phase 2 inspection is necessary. The environmental consultant will recommend a Phase 2 inspection if the Phase 1 inspection finds evidence of a contaminant at the site. Such a finding does not render the site undevelopable; it just means further investigation is required and remediation may take longer and be costlier. A Phase 2 inspection should include:
  • Analysis of sub-surface soil, groundwater (including monitoring of wells) and air 
  • Taking samples of mold, asbestos, and lead if present 

The deal team should use the Phase 2 inspection report to make informed decisions regarding the purchase and development of the site.

After completing due diligence and moving forward with the site purchase, the deal team will negotiate with the seller on the terms and conditions of the sale. It is common for the buyer to assume all pre-close risk of loss due to environmental liabilities from both known and unknown contamination. Because the sale of the site is considered “as is, where is,” before the purchase of the site, the investors create single purpose entities (SPE), most often LLCs. The SPEs are created and used to insulate investors from loss beyond the assets of the targeted investment from remediation until operations. Once the parties reach final terms, the transactions close and the focus is now on development. 


Once the site is purchased, the investors are interested in quickly developing and selling the site to turn a profit. Usually, the first order of business is developing a remedial action work plan (RAWP). (2)  The second is purchasing the necessary insurance coverages for the development of the site.

Instead of relying on traditional risk transfer, SPEs often place an owner-controlled insurance program (OCIP) that includes pollution liability (PL) coverage to ensure that those working on site are adequately insured and to promote certainty as to the coverage for the project. However, these investors may still have outstanding exposures after that site is sold and the LLC is dissolved. (3)  An example exposure is a subcontractor’s employee comes into contact with a harmful substance during the cleanup or development of the site but does not make a claim or bring suit against the investors until after the dissolution of the LLC. Because the injury would likely be deemed to have been caused by a pollution condition, the loss will be excluded from the OCIP’s commercial general liability policy but potentially covered under the PL policy. 

Generally, PL policies contain an “employers liability” exclusion, which may pose problems when seeking coverage for these losses. Accordingly, risk-averse investors may be uncomfortable with the risk, however minor, associated with an unamended employer’s liability exclusion on a pollution policy. Now that the LLC is dissolved, the investors are the “deep pockets” from whom injured employees may attempt to seek recovery for injuries.

The employer’s liability exclusion found on most PL policies excludes coverage for bodily injury to an employee arising out of the employee’s work, whether the SPE is liable as the employer or in another capacity except when the SPE has assumed the liability in an insured contract. The employer’s liability exclusion usually looks something like this –

e.  Employer’s Liability

bodily injury to:

1. your employee arising out of and in the course of:

(a) employment by you; or 

(b) performing duties related to the conduct of your business; or

2. the spouse, child, parent, brother or sister of that employee as a consequence of paragraph 1. immediately above.

This exclusion applies to whether you may be liable as an employer or in any other capacity and to any obligation to share damages with or repay someone who must pay damages because of the injury. However, this exclusion does not apply to the liability you assume in an insured contract.

The courts have not provided clear guidance on whether the exclusion would bar coverage for a developer sued by a subcontractor’s employee when the developer is not the statutory employer. New York has two cases interpreting this language and they provide conflicting opinions. But these cases have only interpreted the Employer’s Liability Exclusion in the context of General Liability policies. But courts may apply a similar analysis because the exclusion language in PL policies is usually similar. 

In Nautilus Ins. Co. v. Matthew David Events, Ltd., 69 A.D.3d 457 (N.Y.App.Div. 1st Dept 2010), the court denied coverage to an insured for injuries sustained by an employee of its subcontractor, based on the Employer’s Liability Exclusion. The court said of the exclusion –

The employee exclusion is very broad . . . . [I]t was applicable whether the insured was liable as an employer or in any other capacity and applied to an obligation to share damages with or repay someone else who must pay damages because of the injury. (Id. at 460.)

However, this case provides limited guidance because the policy at issue in Matthew David Events included a definition of “employee” much broader than the definition in the standard GL policy and in most PL policies. Specifically, the policy in Matthew David Event defined “employee” as “including, but not limited to, any person or persons ‘hired by, loaned to, leased to, contracted for, or volunteering services to the insured, whether or not paid by the insured.’” (Id.) (Emphasis added.) Noting that the insured was liable “as an employer or in any other capacity, the court concluded that, to give effect to the language defining “employee,” the exclusion could not be read narrowly to preclude only coverage for claims by persons who worked directly for the insured –

We agree with Nautilus that giving the words “contracted for” their plain and ordinary meaning, [the insured’s] retention of a subcontractor to perform work for the . . . event . . . constituted services for the insured and thus falls within the scope of the employee injury exclusion. (Id.)

In other words, under this expanded definition of “employee,” a subcontractor’s employee would fall within the definition of a general contractor’s “employee” because the employee had been “contracted for . . . the insured, whether or not paid by the insured.”. (See id.)

The court in Kelleher v. Admiral Indem. Co., 958 N.Y.S.2d 308 (N.Y.Sup.Ct. 2010) reached the opposite conclusion, finding that the “any other capacity” language in the Employment Related Practices Exclusion did not preclude coverage for the non-employer insured because the definition of “employee” in the insured’s policy did not extend to independent contractors. (Id.) This case represents a good result for the policyholder, but, again, its value as precedent is limited. Although Kelleher addresses the “any other capacity” language, which is common to both the Employment Related Practices Exclusion and the EL Exclusion, they are different exclusions. Furthermore, Kelleher, unlike Matthew David Events, is not an appellate level case. Thus, the only appellate level case in New York construing the employer’s liability exclusion is Matthew David Events.

In light of these uncertainties, Matthew David Events might cause anxiety for the investors described above. It is conceivable that a New York court might apply the employer’s liability exclusion on the investors’ PL policy where a subcontractor’s employee is exposed to a pollution event during remediation but afterward brings suit years later when the injury finally manifests and long after the investors have dissolved their LLC.

It is also conceivable that, where a subcontractor’s employee has been injured by a pollution event, a reviewing court might be more willing to extend the employer’s liability exclusion upstream. The societal impulse to punish “corporate polluters” may incline judges of a certain temper to use Matthew David Events as a basis to make an example of upstream policyholders, particularly if the pollution event had widespread incidents of bodily injury and property damage. To be clear, to do this, the court would have to ignore the clear distinction between the operative exclusions. But this would be cold comfort to the upstream investor left without coverage and forced to undertake a coverage action while defending against an action-over suit.

A careful review of the PL policy will provide the SPE developer with a more transparent risk analysis and the potential for Matthew David Events to be applied to the policy. The best way to guard against this possibility is to amend the employer’s liability exclusion to remove the phrase “or any other capacity” to alleviate the risk, however slight, created by Matthew David Events. 

Because the employer’s liability exclusion usually has an exception for liability assumed in an insured contract, another possible way to ensure that the exclusion does not apply to contracts where the Named Insured provides indemnification coverage to an upstream party is to expand the definition of the insured contract. If the definition of insured contract includes a schedule, the SPE may consider amending the blanket language within the schedule of insured contracts endorsements to include all contracts the Named Insured enters into for the project insured under the policy.

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(1) The USEPA defines brownfield as “a property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.”
(2) RAWPs provide a description of the contamination (on and off site), the steps taken to ensure compliance with intended future use, and finally, development of remediation budget.  The RAWP should also include cleanup standards and/or the ability to leave contamination in place via “cap,” which will vary depending on the intended use: industrial building, high-density housing, or commercial/industrial.  Also, the RAWP will determine site elevation compliance in accordance with the ever-changing FEMA requirements. This may supplement or mitigate the need for the “cap” depending upon allowable fill materials. Increases in site elevation can potentially mitigate increased remedial measures but complicate development process due to scarcity of costly clean or suitable fill and increased liability arising from imported fil.   
(3) Requirements for dissolution may vary by state, but dissolution should consider which entity will hold the insurance coverage for those ongoing exposures and ensure that the individual investors continue to have rights as named insureds under the relevant policies.