Corporate PFAS exposure and the effect of transaction provisions

The growing risk of PFAS liability

In time, the use and subsequent spread of PFAS could lead to personal injury, property damage and possibly harm to amenity claims, together with regulatory cleanup actions.

Very sensibly, insurers are trying to establish which of their policies might cover such claims in different scenarios, and which of their insureds, or categories of insured, are most obviously at risk. This is a very complex exercise, with many moving parts.

Focusing on the hidden risk: transfer of liability

This article focuses on one of those parts, namely the impact of contractual/statutory transfer of liability. It is perhaps not the most obvious part, but it could have a very important outcome on the question of who ultimately bears the PFAS liability in any individual case and who is able to escape it.

Key questions to assess historic exposure

When looking at the possible PFAS liability exposure of an insured company, there are some obvious questions to ask. For example: does it make any PFAS? Does it use any PFAS in its manufacturing process or its finished products? Does it have any sites that might be contaminated with PFAS?
These questions need to be asked from a historical standpoint too. In so doing, it is important to remember that companies go through changes. Over the years, internal reorganisations occur. Operational subsidiaries are wound up. Parts of the company are purchased or sold by way of share sales or asset sales. Where these things happen, the transaction is frequently (note, not always) accompanied by contractual devices such as environmental/hazardous substance warranties, liability allocation provisions and indemnities that place the financial burden of contamination liability on whatever party agrees to take it.

The role of historic transactions in allocating PFAS risk

In other words, as the risk to a company from historic operations is being considered, it is worth considering whether that company once had a subsidiary or business unit (now sold or wound up) that had some involvement with PFAS and, if it did, what happened contractually to its liabilities. Did the company agree to retain them, or the purchaser to assume them, of was nothing agreed at all? Similarly, it is worth considering whether that company currently has a subsidiary or business unit acquired from elsewhere and, if it does, whether any provision was made for its historic contamination liabilities.

Limitations of liability transfers: what you don’t know can hurt you

When it comes to the structure of these contractual devices, there are no hard and fast rules. Liability can be diverted in whatever way and for whatever period the parties choose. It is important to note however, and particularly relevant in the PFAS context, that environmental liability transfer provisions sometimes only relate to what the parties knew about when the transaction was entered into. This means that contaminants of which the parties knew little or nothing at all, might fall out of the provisions’ scope. Note also that if one party disappears for any reason, the agreement may well fall away, leaving the liability to find a home under the general law. This may well mean that a party that thought it had made a “clean break” from its liabilities finds those liabilities back on its doorstep.

Spotlight on UK property transactions: hidden PFAS pitfalls

It is worth dwelling especially on one particular type of asset transaction, namely UK property sales and purchases. Buyers fear inheriting contamination liability when they buy property but, when due diligence indicates that the property is generally low risk, will often be persuaded to accept either:

• a full transfer of all liability from the seller of the seller’s liability for all contaminants (whatever they may be); or
• a transfer of regulatory liability from the seller relating to contaminants disclosed to the seller.

In the first situation, if PFAS is discovered post transaction, the buyer will have to accept that the liabilities (which will often not even have been tested for in the course of due diligence stage) will be its responsibility – even where the seller introduced the PFAS. But in the second situation, the buyer may escape liability for lately discovered PFAS, and the seller will find the contamination liability (that it hoped it had passed on) bouncing back, at least so far as PFAS is concerned.

Why scrutinising past provisions matters more than ever

All in all, consideration of the content of liability transfer provisions in past transactions, and whether they are of continued effect, is an essential part of getting to grips with a company’s PFAS liability exposure. The exercise could lead to some important discoveries, some good and some bad. Consideration is particularly important in the context of any property transactions, not least because PFAS contaminated property is emerging to be one of the more obvious potential liabilities.