Volume 18, Number 3
April/May 2001

ENVIRONMENTAL CONTAMINATION: MAKING A CLAIM FOR PROPERTY DAMAGES

Gail L. Wurtzler

Claims for property damages due to environmental contamination can arise in a number of situations and can be asserted by property owners affected in a variety of ways. Consider a hypothetical situation in which the current owner of an industrial or commercial property learns that a former owner released hazardous substances onto the property, contaminating it and possibly contaminating neighboring property. The current owner may face potential diminution in the value of the property; possible government agency requirements to remediate the contamination that, regardless of who ultimately pays for the work, will nonetheless affect property use for a period of time; and potential claims from neighboring property owners. The owner may sue the former owner based on all of those potential exposures.

Similarly, neighbors may be concerned about effects on their properties and, if the property has been contaminated, whether they will be subject to any remediation requirements or whether the value of their property has been affected. Neighbors whose property is not physically contaminated may worry that property values may be adversely affected merely because of proximity to the contamination. The neighbors may sue either or both of the former and current owners of the industrial/commercial site.

In this hypothetical, there are three potential plaintiffs or groups of plaintiffs, each seeking to assert claims for property damages and each proceeding under different legal theories. A number of issues typically arise in such property damage cases. This article focuses on the effect of a finding that property contamination is temporary as opposed to permanent on the type of relief available; possible measures of damages; and the availability of "stigma" damages. Variation among state laws on these issues exists because there is not a U.S. common law of torts. Nonetheless, some general principles apply.

Temporary versus Permanent

Whether the injury to property or its use is temporary or permanent is a significant distinction that affects whether relief in the form of an order requiring abatement is available and, if abatement is not ordered, the measure of damages. A temporary injury is one that is abatable. To several courts and under the Restatement (Second) of Torts § 839 cmt. f, that means contamination can be cleaned up by reasonable means at a reasonable cost.1 However, an injury to property might be considered to be permanent if abatement is either impracticable or impossible.

If the contamination is found to be permanent, most courts ordinarily will not require a defendant to make an unsuccessful attempt to abate the contamination. However, they will require the defendant to pay the plaintiff damages for the permanent injury caused by the presence of contamination. Ordinarily, the measure of those damages is the difference between the value of the property as it is and the value it would have had were it uncontaminated. The measure of damages is based on the permanent loss in property value due to the contamination. If the contamination is found to be temporary, then an order requiring abatement is an available remedy. In some states such as Pennsylvania,2 where injury to property is presumed to be temporary and thus abatable, abatement is generally the preferred remedy. Abatement does not usually mean removing all traces of a contaminant from the property, nor is it equivalent to returning the property to a state existing when the earth was new. Rather, as ordered by the Mangini court, for example, abatement may be directed toward removing sufficient contamination to meet government regulatory levels established to protect the environment, health, and safety, or other risk-based levels considered to protect public health or the environment. Generally, prior to and during the abatement activities, the property owner suffers at least some loss of, or interference with, use of the property. Courts acknowledge the existence of this injury. When a defendant is ordered to abate contamination, the courts often also require the defendant to pay damages determined by the amount needed to compensate the plaintiff for the loss of the property's use or rental value during the time the contamination exists. In many cases, plaintiffs assert that, notwithstanding abatement, the value of their property is still impaired, and they seek damages for loss of property value. Such a claim is difficult for courts because, as a matter of legal theory, abatement and damages for loss of property value are usually considered to be mutually exclusive remedies. An order of abatement is premised upon findings that the injury is temporary and can be remedied by the selected means of abatement, thereby restoring or preserving the value of the property. An award of damages for post-remediation impairment in property value is therefore inconsistent with the basis for an order of abatement. For this reason, many courts like the court in Santa Fe Partnership v. ARCO Products Co.3 apply a general rule that they will not award damages based on a loss of property value if they have ordered an abatement remedy.

There are exceptions to this general rule. Some courts acknowledge that it is possible that abatement will not fully cure the injury to the plaintiff's property. Examples include cases in which remediation does not reduce contamination to a level that is fully protective of public health or the environment; the plaintiff faces some ongoing risk of liability for cleanup costs or third-party claims; or the plaintiff's use of the property is still impaired. In these cases, the courts, like the court in Johansen v. Combustion Engineering, Inc.,4 may order abatement and award damages based on loss of property value for any permanent injury that will not be remedied by the abatement.

Measures of Damages

Ordinarily, the measure of damages for injury to property is either its loss in value or the cost of repairing the property. As noted in the Restatement (Second) of Torts § 929, the goal of an award of property damages is to compensate the landowner fully for the injury to his property. In particular, "The trial court must take as its principal guidance the goal of reimbursement of the plaintiff for losses actually suffered, [and] must be vigilant not to award damages that exceed the goal of compensation and inflict punishment on the defendant or encourage economically wasteful remedial expenditures by the plaintiff."5 The judge, not the jury, must determine whether a cost-of-repair or loss-of-value measure of damages is appropriate. That selection turns on the facts of the particular case.

In making that selection, as is the case in determining whether to order abatement, the court must consider the nature of the injury to property, particularly whether it is reparable and at what cost. Other factors to be considered under the cases and the Restatement (Second) of Torts § 929(1) include whether the cost of restoration is disproportionate to the diminution in value caused by the defendant's action and the nature of the owner's use of the property. However, these factors are not all-inclusive. In fact, as the Slovek court acknowledges, all of the important, relevant considerations for the choice of a measure of damages are not "susceptible to reduction to a set list and...no formula can be devised that will produce litmus-test certainty and yet retain the flexibility to produce fair results in all cases."

Loss in Property Value

The case law identifies several factors that support an award of damages based on loss of property value. Obviously, when the injury is not reparable, an award of damages based on any lost value is required. Such an award is also the preferred remedy when the plaintiff has sold the property and therefore will not be making repairs to it.

An important limitation on awards of property damages based on permanent loss of property value is that a property owner may not recover damages from the entity injuring the property based on permanent injuries that occurred prior to ownership. A landowner takes title subject to conditions in existence at the time of deed. Thus, unless the prior owner conveyed his right of action to the current owner, the current owner has no claim for property damages based on preexisting permanent injuries.

Cost of Repair

Conceivably, cost-of-repair damages could exceed loss-of-property-value damages, especially given the often large costs for remediation of contamination. If so, it is a factor that can weigh against an award of cost of repair damages. Courts in some jurisdictions like California cap the amount of property damages by allowing the plaintiff to recover only the lesser of the cost of repair or the loss of value. In other jurisdictions such as Nebraska and Oklahoma, the cases hold that the amount of cost-of-repair damages may not exceed the pre-tort value of the property or the depreciated value of the land. However, in many other jurisdictions, the rule is not so absolute. For example, a few courts, including one in Indiana, indicate a preference for cost-of-repair damages in situations where government regulatory agencies require the property to be cleaned up to meet certain standards.

As a general matter, courts in those jurisdictions without an absolute rule find a damages award of lost value to be more appropriate when the cost of restoring the property to its original condition exceeds the diminution in value caused by the defendant's act. However, it may still be possible, though difficult, for a plaintiff to recover cost-of-repair damages in those jurisdictions. A federal court in Johansen described the plaintiff's burden as follows: For an injured party to recover restoration costs in excess of diminution in value, however, it must show sufficient personal reasons supporting restoration and that repairs actually will be made...Even upon a showing of personal reasons supporting restoration, the restoration costs still must be reasonable in light of the special considerations presented-that is, given those considerations, they must not be disproportionate to diminution in value....

The plaintiff seeking an award of cost-of-repair damages that exceeds lost value damages must show that the land has "a significantly unique characteristic or that it is put to [a] special use sufficient to justify allowing recovery in excess of diminution in value."8 For example, in addressing the measure of damages for contamination of a city well field, the court in Davey Compressor Co. v. City of Delray Beach9 selected cost of repair damages because "[u]nlike a private landowner, a municipality responsible for supplying drinkable water to a city of over 50,000 residents is not justly compensated by the diminution in value."

In any event, the lack of an absolute cap creates a possibility that a plaintiff will receive a monetary windfall by electing not to repair property. Courts uniformly endeavor to avoid such a result.

"Stigma Damages"

The term "stigma damages" is not one that has a universal definition. For example, "stigma" may refer to an alleged permanent adverse impact on value due to the fact that the property is and continues to be contaminated, i.e., damages based on actual, present contamination. It also may be used to describe an alleged adverse impact on the value of a property that has been remediated but on which some significant contamination remains, i.e., damages based on residual contamination.

In addition, "stigma" is frequently used to describe an alleged adverse impact on the value of a property that is itself uncontaminated but that is in proximity to contaminated land, i.e., damages based on proximity. To make sense of the different holdings on stigma, one must look closely at the facts of the underlying injury to property to determine whether the holding relates to actual, present contamination; residual contamination; or mere proximity to contamination.

Actual, present contamination. The case law is clear that where land is actually contaminated and will not or cannot be remediated, the owner is entitled to recover as damages any diminution in property value caused by the contamination. This damages measure typically compares the value of the property in an uncontaminated state with the property's value in its contaminated state. It is an award based on any permanent loss of property value.

Residual contamination. Some courts absolutely reject the notion that value could still be impaired after property is ordered to be remediated. These courts appear to assume that remediation will completely cure the injury to the property and, therefore, refuse to award residual contamination damages.

Other courts have accepted the proposition that contaminated property that is remediated may still not be returned to its prior uncontaminated state and therefore may suffer continued diminished value. In essence, these courts acknowledge that contamination may be both a temporary injury and a permanent injury to the same land. Before allowing recovery for loss of property value, these courts require evidence that impaired value actually continues after completion of the remedial work. Important evidence for a claim of residual contamination damages includes proof on issues such as whether the plaintiff's property was actually contaminated and, if so, the nature and level of the contamination; the level of cleanup achieved; how that level compares with government health and safety standards; the use of the property; whether restrictions on that use exist due to residual contamination; and whether there is ongoing risk to persons living or working on the property.

The Third Circuit established a three-factor test for residual contamination damages in In re Paoli R.R. Yard Litigation:

  • Defendants have caused some (temporary) physical damage to plaintiffs' property.
  • Plaintiffs demonstrate that repair of this damage will not restore the property value to its prior level.
  • Plaintiffs show that there is some ongoing risk to their land.

In formulating this test, the Paoli court was influenced by evidence that after cleanup the land would still have PCB contamination greater than EPA's usual PCB cleanup standard.10

Proximity damages. The courts are split regarding the availability of proximity damages. A few courts have allowed plaintiffs to recover proximity damages or at least allowed the proximity damages claim to proceed.11 However, the majority of courts considering this type of damage claim have refused to allow recovery of such damages. By their nature, claims for proximity damages are claims based on an actual physical injury to the property of someone other than the plaintiff. Such a claim is barred by a longstanding principle of tort law that precludes recovery for economic losses that do not arise from an actual, physical injury to the plaintiff's person or property.12 As one court noted, a proximity claim is not based on injury to or interference with use of the plaintiff's property. Instead, it is merely based on negative publicity and claimed third-party fears, both of which may be unfounded. It is therefore, as the Adkins court noted, "a loss without an injury in the legal sense."13 The law governing damages claims based on environmental impairment of property is still evolving. Many of the issues discussed in this article have not yet been addressed by appellate courts in every state or even the majority of states. Therefore, developments in this area of the law should be closely monitored.

Notes

  • See, e.g., Mangini v. Aerojet-Gen. Corp., 912 P.2d 1220, 1226, 51 Cal. Rptr. 2d 272 (Cal. 1996); Stevinson v. Deffenbaugh Inds., Inc., 870 S.W.2d 851, 854 (Mo. App. W.D. 1993).
  • See, e.g., In re Paoli R.R. Yard PCB Litig. 811 F. Supp. 1071, 1075 (E.D. Pa. 1992) (citing Kirkbride v. Lisbon Contractors, Inc., 385 Pa. Super. 292, 560 A.2d 809, 812 (1989)), aff'd in part and rev'd in part, 35 F.3d 717, 795-08 (3d Cir. 1994), cert. denied sub nom., 1995 U.S. LEXIS 1686 (Feb. 27, 1995); Gen. Elec. Co. v. Ingram, 513 U.S. 1190 (1995).
  • 46 Cal. App. 4th 967, 54 Cal. Rptr. 2d 214, 220-24 (Cal. App. 2 Dist. 1996).
  • 834 F. Supp. 404, 412 (S.D. Ga. 1993), aff'd, 67 F.3d 314 (11th Cir. 1995), vacated and remanded for reconsideration of other issue, 517 U.S. 1217 (1996).
  • Board of County Comm'rs of Weld County v. Slovek, 723 P.2d 1309, 1316 (Colo. 1986).
  • 723 P.2d at 1315-16.
  • 834 F. Supp. at 409; emphasis added.
  • Id. at 409-10.
  • 639 So. 2d 595, 596-97 (Fla. 1994).
  • 35 F.3d 717, 798 (1994).
  • See, e.g., Sterling v. Velsicol Chem. Corp., 855 F.2d 1188, 1212-13 (6th Cir. 1988); MHE Assoc. Ltd. P'ship v. United Musical Instruments, USA, Inc., 1995 U.S. Dist. LEXIS 5808 (N.D. Ohio Mar. 24, 1995); De Sario v. Indus. Excess Landfill, Inc., 68 Ohio App. 3d 117, 587 N.E.2d 454 (Ohio App. 5 Dist. 1991) (class included owners of uncontaminated property and appellate court did not reverse class certification); Allen v. Uni- First Corp., 151 Vt. 229, 558 A.2d 961 (1988).
  • See Adams v. Star Enter., 51 F.3d 417 (4th Cir. 1995); Ogden v. Star Enter., 70 F.3d 1262, 1995 WL 709862, *2 (4th Cir. 1995); Berry v. Armstrong Rubber Co., 989 F.2d 822, 829 (5th Cir. 1993), cert. denied sub nom., Cooper v. Armstrong Rubber Co., 510 U.S. 1117 (1994); O'Neal v. Dep't of Army, 852 F. Supp. 327, 336 (M.D. Pa. 1994); Lamb v. Martin Marietta Energy Sys., Inc., 835 F. Supp. 959, 968-970 (W.D. Ky. 1993); Adkins v. Thomas Solvent Co., 440 Mich. 293, 487 N.W.2d 715, 724-727 (1992); Leaf River Forest Prod., Inc. v. Ferguson, 662 So. 2d 648 (Miss. 1995). See also In re Paoli, 35 F. 3d at 798 n. 64.
  • Adkins v. Thomas Solvent Co., 487 N.W.2d at 725.

Gail L. Wurtzler is a partner in the natural resources department of Davis Graham & Stubbs LLP in Denver, Colorado. Her practice focuses on litigation of complex issues in the area of environmental and natural resources law. She is a former editor-in-chief of Natural Resources & Environment, the journal of the ABA Section of Environment, Energy, and Resources.

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