Federal environmental remediation contractual and insurance-based risk allocation schemes: are they getting the job done?

Air Force Law Review, Spring, 2006 by Amy L. Momber

  I. INTRODUCTION
 II. BACKGROUND
     A. Variant Cleanup Site Conditions
     B. Complexity of Environmental Laws
        1. CERCLA Overview
        2. RCRA Overview
        3. The Environmental Law Conundrum
     C. Community Interest in Environmental Work
     D. Potential for Phenomenal Unanticipated Expense
     E. Motivations for Undertaking Remediation Projects
III. CONTRACTUAL METHODS FOR REDUCING/SHIFTING RISKS.
     A. Contract Type as a Risk-Shifting Mechanism
        1. Cost-Reimbursement Contracts
        2. Fixed-Price Contracts
        3. Contracting Techniques Relative to Contract Type
           Selection
        4. Selecting the Type of Contract for Use in Negotiated
           Procurements
     B. Contract Specifications as a Risk-Shifting Mechanism.
        1. Design Specifications
        2. Performance Specifications
        3. Design and Performance Specification Risk
           Allocation
     C. Contract Clauses as a Risk-Shifting Mechanism
        1. Differing Site Conditions Clause
        2. Changes Clause
        3. Permits and Responsibilities Clause
        4. Indemnification Clause
 IV. ENVIRONMENTAL INSURANCE AS A
     RISK-SHIFTING/REDUCTION METHOD
     A. Types of Environmental Insurance Coverage
        1. Cleanup Cost Cap Policies
           a. Scope
           b. Exclusions
        2. Pollution Liability Policies
           a. Scope
           b. Exclusions
        3. Finite Risk Policies
        4. Contractor's Pollution Liability Policies
        5. Errors and Omissions Policies
     B. Problematic Aspects and Drawbacks
        1. Completeness of Coverage
        2. Availability of Coverage
           a. Policy Costs
           b. Policy Dollar Limits
           c. Policy Time Limits
        3. Payment of Claims
     C. Cost/Benefit Analysis
  V. THE LOCKHEED FAILED PIT 9 CLEANUP
     A. The Site
     B. The Remediation Plan
     C. The Request for Proposals (RFP)
     D. Contract Specifications
     E. Contract Clauses
        1. Guarantee of Performance (GOP) Clause
        2. Differing Site Conditions Clause
        3. Permits and Responsibilities Clause
     F. Risk Allocation Overview
     G. Risk Allocation Ramifications
 VI. THE PERFORMANCE-BASED CONTRACTING (PBC)
     INITIATIVE
     A. Types of Performance-Based Contracts (PBCs)
     B. Government Agency Involvement
     C. Potential Benefits of PBC
     D. Potential Drawbacks of PBC
        1. Profit Motive
        2. Reduced Government Agency Oversight
        3. Contractor Risks
     E. Recommended PBC Considerations
VII. CONCLUSION

I. INTRODUCTION

Federal environmental remediation projects are laden with risks--risks that are often undetectable before remediation work begins. Recognizing they cannot specifically account for such unknown contingencies via contract, the government and remediation contractors employ contractual and insurance-based methods to shift or reduce their respective risks. This article examines and critiques the effectiveness of such risk-shifting measures as they pertain to the government, the remediation contractor, and, most importantly, getting the job done.

To provide a foundation for understanding federal environmental remediation contracts and risk allocation therein, Chapter II begins with an overview of the circumstances that make federal environmental remediation contracts unique. Those circumstances include the variant conditions of cleanup sites, complexity of relevant environmental and federal procurement laws, heightened community interest in project successes and failures, and contracting parties' potential exposure to staggering unanticipated expenses. Chapter II concludes with an analysis of government and contractor motivations for taking on such risky projects. This background is essential because some, if not all, of these factors frequently impact the way federal environmental remediation contracts are structured.

Federal environmental remediation contracts are generally structured in a manner that clearly assigns risks to one party or the other. With that in mind, Chapter III provides a detailed look at the contractual methods for reducing or shifting federal environmental remediation risks. The contract type, specifications, and clauses are the primary contractual risk-shifting measures examined in this section. Brief case studies are also provided to offer a glimpse into how courts and boards generally interpret these mechanisms.

Faced with limited success in employing such mechanisms, contractors often consider (and the government frequently even requires) purchasing environmental insurance to protect themselves against the risks inherent in federal environmental remediation projects. Therefore, Chapter IV explores the risk-shifting benefits of five types of environmental insurance coverage: Cleanup Cost Cap policies, Pollution Liability policies, Finite Risk policies, Contractor's Pollution Liability policies, and Errors and Omissions policies. To provide a complete picture of environmental insurance as a risk-shifting measure, the chapter also cautions against policy exclusions and highlights difficulties associated with acquiring sufficient coverage to effectively shift or reduce policyholder risks in any given case.