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Why a Clean Phase I Doesn't Mean You're All Clear


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All too often we hear from our clients or prospects that they don’t feel that they need an environmental insurance policy because they have a “clean” Phase I report. Unfortunately, this can be a costly misunderstanding.

A Phase I Environmental Site Assessment is merely the guidance document that is used as a baseline by the environmental due diligence community. While having a clean Phase I report is a good start and does offer some level of comfort, by no means does it fully mitigate the environmental risk at the site. The Phase I report only provides a brief snap-shot into the environmental history at the site, and is only as good as the information that was available to create it. The Phase I report will not identify any operational exposures such as mold, legionella, disinfection, new spills, etc. that may occur during the day-to-day operations of a site. Operational exposures exist in just about every class of business and it is incredibly important to ensure that you are protected.

What a Clean Phase 1 Means

Let’s start out with what is required to be an ASTM 1527-13 compliant Phase I report. An ASTM compliant Phase I Report must include the following elements: current site visit, interviews, database research, historic source research, AUL/lien search and non-scope considerations, all summarized in a detailed narrative report. The entire Phase I Environmental Site Assessment (ESA) research and reporting process should be overseen by an environmental professional who meets the educational and experience requirements outlined by ASTM. The final report should be reviewed and signed by both the assessor and the environmental professional responsible for the scope of the Phase I ESA.

Limitations of a Phase 1 and Coverage Considerations

One of the most important elements to understand regarding a Phase I ESA is the user requirements, and especially, first defining who the “user” is. As an example, a report prepared for a potential buyer will be intent on identifying potential liabilities associated with acquiring, owning and operating the subject property, which is why it is important to keep in mind caveat emptor, or buyer beware, as once the new owner takes title they are responsible for environmental conditions on-site, barring an indemnity from the seller. A Phase I ESA prepared for a lender for financing might consider environmental conditions on-site differently, as they are not intending on taking title to the subject property, although that can be a risk when the property is used as collateral in a future foreclosure.

Below are just a few scenarios to think about that would not have been identified in a Phase I report but would typically be covered by a pollution policy:

  1. Illicit abandonment
  2. Underground storage tanks
  3. Closed historic release
  4. Mold outbreak

Finally, it is important to review all of the transaction documentation, such as purchase and sale agreements, environmental indemnities, and loan documents to ensure that the there is no requirement for environmental coverage and that the client is not exposed through these agreements. Very often we find that these agreements are not as strong as one may think, leaving the client exposed to a potentially costly environmental claim.

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