Per- and polyfluoroalkyl substances (PFAS) are a group of thousands of chemicals that have unique physical characteristics, such as the ability to resist heat, oil, stains, grease and water. Some of the more commonly known chemicals in the PFAS family are perfluorooctane sulfonic acid (PFOS) and perfluorooctanoic acid (PFOA). In September 2022, EPA proposed listing PFOA and PFOS as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Three months later, EPA finalized changes to how parties seeking CERCLA liability protection conduct diligence on potentially contaminated properties—now parties have guidance on how to evaluate PFAS. For these and other reasons, it is crucial for counsel advising clients on brownfields and similar transactions to understand the evolving PFAS landscape.
Environmental due diligence in real estate transactions involves the assessment of known, potential, and contingent environmental liabilities and obligations associated with a parcel of property to be acquired. With respect to PFAS, environmental due diligence in the real estate context tends to focus on: (1) known or potential soil or groundwater contamination beneath the property from current and historic uses, (2) the potential for contamination to migrate to the property to be acquired from offsite locations; and (3) compliance with environmental requirements.
Under CERCLA, parties can be held strictly liable for cleaning up hazardous substances at properties they either currently own or operate, or owned or operated in the past. The definition of a hazardous substance is lengthy and references multiple EPA regulations, including CERCLA, the Resource Conservation and Recovery Act (RCRA), the Clean Water Act (CWA), and the Clean Air Act (CAA). In September 2023, EPA published a proposed rule to designate PFOA and PFOS as hazardous substances under CERCLA. The White House Office of Management & Budget (OMB) initiated interagency review of the final rule in early December 2023, and EPA is expected to finalize the rule in March 2024. EPA is also considering designating seven additional PFAS chemicals, PFAS precursor chemicals and “categories of PFAS” chemicals, as hazardous.
CERCLA requires parties purchasing potentially contaminated property undertake “all appropriate inquiries” into prior ownership and use of property before purchasing the property to qualify for protection from CERCLA liability for costs relating to releases of hazardous substances. Since 2005, EPA has promulgated regulations that set standards and practices for all appropriate inquiries, in large part through incorporating by reference ASTM International standards. In November 2021, ASTM International issued the latest Standard for Phase I Environmental Site Assessments (ESAs) (E1527-21). Among other updates and revisions in the new standard, ASTM E1527-21 recommends evaluating PFAS and other emerging contaminants as Non-Scope Considerations either when requested by the “User” of the Phase I ESA or to satisfy requirements in states that already have established regulatory standards for PFAS, which could result in PFAS or other Non-Scope Considerations being identified as a Business Environmental Risk (BER). ASTM E1527-21. EPA has formally adopted ASTM E1527-21 as the all appropriate inquiries standard for most properties.
The objective of a Phase I ESA is to identify recognized environmental conditions, or RECs, which requires the presence or likely presence of a hazardous substance or a petroleum product. Until PFAS chemicals are designated as hazardous, an appropriate classification for potential or known PFAS impacts at a subject property is a business environmental risk (BER). A BER is a risk that “can have a material environmental or environmentally-driven impact on the business.” Emerging contaminants are listed as an example of a BER based on the potential for future liability as regulations for these compounds evolve. If a Phase I ESA is being done to obtain liability protections within a state that has regulated PFAS, it may also be appropriate to classify PFAS impacts as a REC.
PFAS can be found in a variety of applications and industries dating back to the 1930s and 1940s. Identifying former operations and the associated timing of those operations is critical to identifying potential sources of PFAS impacts. Fire training facilities or locations of actual fires may be a source of aqueous film-forming foam (AFFF). A coating facility may have used PFOA or PFNA, whereas a metal plating facility may have used PFOS. Landfills contain numerous types of PFAS because of the variety of products that are disposed. In addition, impacts may be found at wastewater or sewage treatment plants and sludge disposal sites due to the inability of traditional water treatment technologies to remove PFAS from wastewater. Equally as important as identifying sources is identifying potential pathways to the environment beyond a typical release of a chemical. These include unlined lagoon systems, land application, and air deposition.
Interested parties are also collecting PFAS-related data. Through its PFAS Analytical Tools, EPA is compiling and integrating a community-based collection of data regarding PFAS manufacturing and known releases. Commercial vendors such as ERIS and Lightbox (formerly EDR) are now including PFAS databases in their radius searches based on compiled data. These databases can serve as useful starting points; however, the analysis should not end there. For example, a database may confirm that PFOA or PFOS (but not other PFAS) contaminants have been detected in water or soil. Others may include a facility solely based on a North American Industry Classification System or similar sector code.
If a Phase I ESA identifies presence or potential presence of PFAS at a subject property, a Phase II ESA may be conducted to evaluate the scope of PFAS impacts. In the PFAS context, there are several important factors to consider.
The Phase I ESA should inform the user of the potential source(s) of PFAS and, therefore, can inform the specific PFAS compounds that may be present. Because PFAS are ubiquitous and are often detected at concentrations above very low regulatory limits or health advisories, a user should consider analyzing for only a subset of PFAS compounds based on former site operations. In this way, detection of “background” concentrations of other PFAS not associated with the subject property may be avoided. PFAS may also behave differently than other common contaminants in the environment. For example, because they are highly soluble and have less preference for sorption, one might find high concentrations in groundwater but very little detections in soil, even in a source area.
Selecting a laboratory and an appropriate method of analyzation are equally important. Regulatory agency-approved methods are continuing to emerge, and not all commercial labs offer the appropriate methods or accreditation or the ability to analyze for all relevant PFAS. In many cases, PFAS analysis has longer turnaround times for obtaining laboratory data, and fees are substantially higher than more traditional testing for volatile compounds or metals.
Sampling itself presents significant challenges associated with cross-contamination. PFAS are common in environmental sampling equipment and materials. They are often found in the personal care products we use, the clothes we wear, and the things we touch before or during a sampling event, such as food wrappers and sunscreen. Even water sources needed for decontamination or drilling may be impacted by PFAS, which can be introduced into the environment or the equipment and result in false positives. Lastly, disposing of investigation-derived waste (IDW) can be challenging because many waste disposal facilities do not accept PFAS-impacted wastes or do so at a premium. The environmental engineers, scientists, and geologists scoping and conducting a Phase II ESA should understand the challenges of collecting and analyzing PFAS-impacted media so that environmental data is defensible and can be used to make important decisions regarding property acquisition and reuse.
Finally, forensic tools can also be useful. Desktop reviews of historical information, chemical fingerprinting, and ratio comparisons have been used for decades to help distinguish between contamination sources. The same way the presence of MTBE in petroleum-impacted media can help determine the timeframe of the release, PFAS fingerprinting can identify sources of contamination based on the chemical signature. There are also forensic tools unique to PFAS that include isomer comparisons, specialized analysis such as precursory assays, and AFFF forensics. These technologies are still emerging but may be helpful in litigation and “proving the negative.”
Most of the existing scholarship related to insurance coverage for PFAS addresses possible coverage in older commercial general liability (CGL) policies. Pursuing CGL coverage has its place in a broader PFAS risk management context but is a relatively low-percentage effort. This is largely (although not exclusively) because CGL policies have, since at least 1986, been subject to the “absolute pollution exclusion,” which excludes from coverage any pollution release that occurred during the applicable policy period. For that reason, any PFAS-related release that occurred after 1986 will face an uphill battle in a CGL, PFAS-related coverage effort. Nevertheless, it is worth reviewing older CGL policies to determine any potentially applicable coverage.
As a preliminary matter, there is a common misunderstanding that pollution legal liability (PLL) coverage—both within the context of PFAS and generally—covers only (i) “unknown” events that could give rise to a pollution release; (ii) pollution releases that occur during the policy period. In fact, much of the value of PLL coverage is its ability to (sometimes) provide coverage for known pollution issues, and especially those pollution issues issues that may have occurred in the past, often long in the past. Thus, PLL coverage can be critical for companies that in the past may have used or handled PFAS-containing products in their processes or manufacturing (or, in the transactional context, are looking to purchase properties or companies that may have done so).
The remainder of this Section V is designed to provide a brief, heuristic roadmap for obtaining some level of PFAS-related PLL coverage, which can enable a property owner/operator to ring-fence PFAS risk in some manageable (and hopefully quantifiable) way.
The threshold question is whether an owner/operator can obtain go-forward pollution coverage for a site that may be subject to historical PFAS releases. Generally speaking, PLL underwriters disfavor the relatively unsettled regulatory status of PFAS compounds, and for good reason: not knowing what standard might be applied a few years down the road when they are providing ten years of coverage can expose them to significant claims. That being said, PLL insurance companies can and do provide coverage for PFAS. Whether, and the extent to which, an owner/operator can procure PFAS coverage depends on the historical use of a site, current use of a site, historical recordkeeping, and the regulatory backdrop of the state where a site is located.
It is important to parse out the type of pollution coverage an owner/operator may seek. First, and often the most difficult to obtain, is what is commonly referred to as “clean-up cost” coverage, which is often the primary concern of PLL insurance companies in the PFAS context. Second, and applicable particularly to PFAS-related medical monitoring claims, is bodily injury and property damage coverage. Third is PLL coverage for an operation’s business interruption (including loss of rent) resulting from a pollution release. And fourth is a series of ancillary coverage sections (e.g., coverage for a release during transportation or at a non-owned disposal site, etc.).
It is not uncommon for PLL insurance companies (as is the case with the procurement of new CGL insurance) to include broad PFAS exclusions during the quotation procurement stage, but there may be room to push back. For example, if there is no documented historical PFAS use at a subject property, any such exclusion should be removed. Even for sites with documented historical PFAS use, PFAS-related PLL coverage may still be obtained in certain circumstances. For example, where PFAS sampling data is available for a property, and that data does not indicate the presence of PFAS compounds, coverage may be obtained. Additionally, where sampling data is available for other pollutants often found together with PFAS for the property, and such pollutants are not present, there is an argument that PFAS compounds also are not present.
However, even in the face of a cleanup cost exclusion, the owner/operator can take steps to limit the exclusion. First, an owner/operator could advocate for cleanup coverage that is only triggered by a cleanup mandate from a regulator. This approach is especially useful for policies with longer terms (e.g., five or ten years) in states that have not yet promulgated PFAS cleanup levels. Second, in the face of a cleanup cost exclusion, it may be worthwhile to try to limit the media to which the exclusion applies. For example, an exclusion could be limited to soil cleanup in order to retain cleanup cost coverage for groundwater issues that may arise. Third, even without cleanup cost coverage, an owner/operator can still obtain those meaningful other coverages that PLL offers, including bodily injury and business interruption. Finally, the owner/operator could seek to limit an exclusion to only those compounds that were part of the historical use and not “PFAS” generally.
As sellers and buyers work to identify potential environmental liabilities in their real estate deals, both parties should consider the potential presence of PFAS compounds and associated risks. Several areas of a typical purchase and sale agreement (PSA) implicate PFAS risks. For example, a “hazardous substance” definition could list specific PFAS chemicals or PFAS chemicals as a class, or cross-reference substances as defined by Health, Safety, and Environment (HSE) law, or include some combination thereof. Additionally, a seller may want to include a “no-dig” clause since any non-essential sampling may result in PFAS detection at actionable levels, while a buyer would likely seek broad exceptions to such a clause. Finally, a seller who knows or suspects PFAS releases could schedule such conditions, and the parties could consider the effects of scheduling them on their allocation of liabilities.
In addition to assigning rights and responsibilities between themselves, the parties to a real estate transaction with PFAS risks should consider how they address such risks with regulators. First, many properties with historic contamination are subject to “no further action” letters from state or federal regulators, which can limit post-acquisition liability, but those letters almost always have re-openers for events such as changes in facts (such as the discovery of PFAS) or changes in law (such as a new hazardous designation or lower cleanup level). Second, once PFOA, PFOS, and other PFAS compounds receive hazardous designations, buyers may be able to use CERCLA’s bona fide prospective purchaser protections for sites with those contaminants. So, a buyer who complied with the all appropriate inquiries standard and observes continuing obligations could be insulated from CERCLA liability. Similarly, states may start to include PFAS risks in prospective purchaser agreements or brownfields agreements, though a property subject to such an agreement would likely still need some institutional controls and/or remediation with respect to the PFAS contamination. Finally, states can vary in their policies toward liability for contamination (which may or may not cover PFAS) that has migrated to a subject property from an offsite source.
