Who’s Crying Over Spills?

Claim and litigation management professionals are well acquainted with demands for contribution toward clean-up costs brought against landowners or prior landowners based on the discovery of historical spills on property. These claims present a wide spectrum of fact patterns, depending on period of ownership, nature of the spill, due diligence by the insured in the acquisition of the property, and the nature of the entity prosecuting the claim.

Case Study

Assume an insured government entity (e.g., a Board of Education) acquired a site in 1990 and remains the owner. It acquired the property for redevelopment purposes after the property had been condemned by the municipal authority (due to abandonment). Prior to taking title, the Board never conducted a Phase I study of the site, which sat dormant until hazardous material was discovered during the construction of a public school. Historic data indicates that the contamination dates back 40 years. The Board conducted no activities that could have led to contamination. The Board self-reported the condition to the New Jersey Department of Environmental Protection (NJDEP), which opened a file, invoked the Spill Compensation and Control Act, and demanded that the Board undertake remediation of the site.

Who’s Liable?

In this fact pattern, the Board falls within the broad category of “other persons who are liable.” The Spill Act is structured so that the current owners of a property purchased before September 14, 1993, are liable for removal and cleanup costs unless they can prove that they: acquired the property after the discharge occurred, did not know or have any reason to know of the discharge when they acquired the property, are not in any way responsible for the discharge, and gave notice of the discharge to the NJDEP upon discovery. Under the Spill Act, a landowner who never contributed to the spill may still be liable for hazardous substances found on or originating from their land. Government entities such as towns and counties are not automatically immune from these claims.

Are there defenses to this claim aside from trying to find the prior owner and/or polluters and bringing a contribution action for response costs? Because of its lack of any due diligence in its acquisition of the property, the so-called innocent purchaser defense will not be available to this Board.

Safe Harbor

The New Jersey legislature fashioned a safe harbor for the limited situation of property acquired by a government entity by any means, including condemnation. The 1993 amendment to the Spill Act added a provision that a government entity that acquires contaminated property by virtue of its function as a sovereign, is not liable for a discharge that occurred or commenced prior to the period of ownership.

In 1997, the Spill Act was again amended to encourage redevelopment of former industrial sites that remained vacant or underutilized in part due to contamination. This broadened the immunity conferred on public entities to include property acquired for redevelopment purposes. Any suggestion that liability might nevertheless attach in this situation because of the lack of sufficient due diligence in acquiring the property was dispelled by the Committee statement that accompanied the legislation:

Although the law generally provides that public entities are not liable for existing contamination on land they acquire through actions such as a tax lien or foreclosure, a public entity may be liable for knowingly and voluntarily acquiring contaminated property, even if for a public purpose such as redevelopment. The committee substitute amends the law to limit public entity liability for contaminated property they acquire by any means.

The public entity immunity insulates public entities that acquire property, voluntarily or involuntarily, from Spill Act liability by rendering them immune from the cost of cleanup and remediation of hazardous substances, except in the limited circumstances in which the public entity caused the contamination. This is true regardless of whether the entity conducted a sufficient Preliminary Investigation or Phase I.