Beyond compliance: environmental risk assessments at industrial properties.

A manufacturer continuously operated a machine to punch holes in sheet metal. A portion of the machine was located beneath the floor. For more than 20 years, lubricating oil from the machine's moving parts was released into surrounding soils. When nearby homeowners' down-gradient wells used for

Although the leaking machine is an extreme example of what can happen to an unchecked environmental exposure, there is an unrecognized facet of this story. If the site was leased, liability for the exposure may have been co-owned. In some circumstances, the business owner would share cleanup costs with the property owner, even if the property owner had no dealings with the manufacturing operations. Facility managers, as well as property owners, cannot afford to overlook such environmental risks.

Supplementing regular compliance audits with an Environmental Risk Assessment Survey (ERAS) is a highly effective method of identifying potential exposures associated with a facility's operations and procedures. The ERAS helps a company move beyond the checklist approach of finding out what is wrong to the active approach of making things right. When applied as a clause in a site leasing agreement, in cooperation with a tenant's risk management efforts, an ERAS helps protect a property owner from environmental liabilities.

Proactive Loss Control

The strength of an ERAS lies in its proactivity. While a compliance audit simply measures if and where regulations are being met, an ERAS measures compliance, identifies significant and subtle areas of risk, and then recommends an appropriate risk management program, such as who to contact in the case of a spill or what steps to take to prevent contaminants from spreading to surrounding areas and incurring further liability.

Depending on the site-specific situation, a similar event at two different facilities could produce dramatically different losses. For example, the catastrophic rupture of an above-ground storage tank containing methanol at a facility utilizing an impermeable secondary containment structure will have minimal impact on the facility's soil. But that same ruptured storage tank, minus the secondary containment and situated on a site that is sloped toward a recreational waterway, will have a devastating impact on the waterway's environmental condition. It is the environmental and/or plant manager's responsibility to minimize the exposures associated with their particular operation. Identifying and minimizing risks can be done by conducting an in-house assessment, retaining a third-party assessment firm, or employing a combination of both.

ERAS Components

The ERAS is structured to evaluate existing standard operating procedures and facility programs for their effectiveness in reducing or eliminating both potential catastrophes and gradual events. This is accomplished by assessing various areas of an operation.

Corporate organization. Initially, the risk management consultant gathers information on the overall company philosophy. Does management appear to be proactive or reactive when addressing potential environmental exposures? Is management committed to implementing recommendations for reducing existing exposures? At the outset, management may indicate its commitment, but its attitude can change at budget time.

Environmental setting. Who are the surrounding tenants or neighbors? What are the underlying soil and groundwater characteristics at the site? Where are surface water bodies located in relation to the site? Is the groundwater or surface water used for potable purposes? Resources should be allocated to protect environmentally sensitive areas.

Layout and History. What were some past environmental practices? An important area of concern for the property owner is the operation's layout. Do facility operations take place along the property border or is there a buffer zone of several hundred acres? Is the storage room for flammable materials properly constructed to prevent fires from spreading to other parts of the facility?

Operations. How are materials such as ash or hazardous wastes stored and handled? Are acids properly contained to prevent a release to the surrounding environment? What about caustics? What types of pollution control equipment are utilized to reduce the amount of pollutants discharged to the air, water, and soil?

Training. Effective employee training can reduce or prevent the likelihood of a catastrophic event. With regard to the operations being performed, are the facility's training programs adequate?

Contingency planning. In the event of a catastrophic event, are the tenant's personnel sufficiently prepared to respond? Efficient emergency-response planning can help reduce the severity of a hazardous spill or release.

Common Exposures

Although environmental exposures vary depending on operations, they can be broadly categorized. The ERAS evaluates each different type of exposure and recommends solutions to minimize risks. The following list provides examples of common exposure categories and common solutions to consider. Though some of these exposures are easily recognized by a properly trained property manager, a third-party ERAS provides much more detailed evaluations and recommendations to help determine how to best work with a tenant in reducing identified environmental exposures.

Surrounding environment. Areas surrounding an industrial operation can be impacted by plant activities. Such areas may include surface water bodies, outdoor recreation areas, residential neighborhoods, or neighboring plant facilities. With this in mind, thoroughly evaluate surrounding areas to determine the impact of day-to-day plant activities, the potential impact of likely environmental incidents, and third-party claims that may result from such activities and incidents.

Chemicals. Exposures can range from storage of incompatible materials such as alcohols and concentrated acids or bases to those with dangerous physical properties. Proper storage of incompatible materials helps to reduce leaks or spills that could cause an unwanted chemical reaction.

For example, if it is known that two materials cannot be mixed without causing an environmental incident, such as an explosion or release of toxic gas, then segregate the materials in separate buildings. If separate buildings are infeasible, a simple concrete berm between the materials can prevent any leaks from contacting one another.

Failures. Equipment failures generally cause a release of liquids and/or gases into the surrounding environment and range from minor discharges that can be easily localized to catastrophic events affecting an operation at large and surrounding areas. First steps toward prevention of equipment failures are the use of well-documented, periodic equipment inspections and maintenance schedules.

Accidents. An accident in an industrial facility most likely results in a sudden release of a chemical or hazardous material. Examples include a driver backing into a bulk storage tank, improper process valve settings, discharge during loading activities, and so forth. Though it is impossible to totally eliminate all accidents, a review of the facility's standard operating procedures may uncover potential accidents.

Disasters. Natural disasters - such as floods, violent storms, earthquakes, etc. - are unpredictable, but the impact of possible disasters can be minimized by taking precautionary steps. For instance, if a facility is located within a 100-year flood plain, it would be wise not to store drums in an area that will be submerged some time.

Sabotage. Sabotage can come from sources that are internal and external. External threats can often be dealt with by protecting all processes, storage tanks, and loading/unloading areas during non-working hours. This may be accomplished with fences, motion detectors, or other advanced security systems. During working hours, vigilant security checks at entrance/exit areas are a common first-line deterrent. Internal threats are more difficult to manage, especially with the existence of laws designed to protect employees' privacy. Hence, appropriate actions can be complex.

Determining Priorities

The potential exposures uncovered by the ERAS can help a facility better plan its resources to reduce or eliminate risks. This will require that a lessee's corporate and/or plant management set priorities. Though it is ultimately up to the tenant to set its own priorities, the property owner or manager should be aware of what those priorities are to see that the ERAS process is followed through to the end. It will be in the property owner's best interest to negotiate the order of certain priorities. The owner may wish to include certain provisions in the lease as to the timetable of loss exposure actions that directly affect the property.

Depending on company policies, factors which need to be taken into account when prioritizing loss exposures include: impact on the employees and neighboring residents; impact on the local environment (air, water, soils, and ground water); likelihood of media attention; and cost of corrections or modifications. The first two factors are evaluated on a site-specific basis. The ERAS will determine impact on the local environment. Other sources must be used to gather health concerns and media-attention factors. Most likely, cost will be the final factor in deciding whether or not to proceed.

When it is time to decide what changes, if any, should be made, representatives from the tenant's engineering, environmental, production, sales, and marketing should all be consulted. Because the responsibilities of these departments overlap, a change from an environmental standpoint may affect other areas. Ultimately, a company-wide goal to reduce or eliminate potential environmental exposures must come from upper management if it is to succeed.

Who's Responsible?

At some point, the issue of who is responsible for the ERAS will be raised. While specific regulations governing which party is responsible for conducting and paying for an ERAS vary from state to state, or may not be present at all, it is in the interest of both property owner and tenant to negotiate ERAS responsibilities prior to finalizing a lease.

For example, a tenant may specify that a property owner conduct an ERAS prior to occupying a site in order to guard against potential, future environmental liability. This also establishes a baseline environmental condition of the site for the property owner. At the conclusion of the lease, the property owner may conduct a follow-up assessment to determine if there have been any environmental impacts as a result of the tenant's operations.

When conducted properly, the ERAS exposes the potential for environmental impairment so that resources can be budgeted over time. The underlying risk management philosophy is that resources applied proactively are minimal compared with the financial consequences of a catastrophic loss.

Steven M. Piatkowski is a senior consultant with Consulting Services Inc., an Exton, Pa., risk management consulting firm that assists clients with assessing, managing, and controlling environmental, health, and safety risks.