PFAS – The New RWI Market Exclusion?

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Taft Stettinius & Hollister

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Established in 1885, Taft is a nationally recognized law firm serving individuals and businesses worldwide, in both mature and emerging industries.
It's been almost five years since the Hollywood film "Dark Waters" brought to the public consciousness the global environmental issue arising from society's pervasive use of per- and polyfluoroalkyl substances...
United States Environment
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It's been almost five years since the Hollywood film "Dark Waters" brought to the public consciousness the global environmental issue arising from society's pervasive use of per- and polyfluoroalkyl substances (PFAS). These chemical compounds, renowned for their water- and grease-resistant properties, have found widespread use in various industrial and consumer applications, from non-stick cookware to firefighting foams, yet we now understand that exposure to PFAS has been linked to deadly cancers, impacts to the liver and heart, and immune and developmental damage to infants and children. Their ubiquity in daily life, coupled with the risk of exposure to PFAS, underscores the magnitude of the challenge presented in remediating PFAS contamination.

Recently, the Biden administration has escalated efforts to tackle the PFAS crisis. On April 10, the Biden administration issued a national, legally enforceable drinking water standard to protect communities from exposure to PFAS. On April 19, 2024, the EPA released a final rule designating perfluorooctanoic acid and perfluorooctanesulfonic – the "Listed PFAS Compounds" – as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, or the Superfund). In addition to the final rule, EPA is issuing a separate CERCLA enforcement discretion policy that makes clear that EPA will focus enforcement on parties who significantly contributed to the release of PFAS chemicals into the environment, including parties that have manufactured PFAS or used PFAS in the manufacturing process, federal facilities, and other industrial parties. These statements merely scratch the surface of what these rules entail. Please refer to the Taft PFAS Insights blog for more information.

In Taft's experience, environmental insurance policies have been excluding PFAS from the scope of environmental insurance coverage for some time now,1 but other insurance products that are not exclusively focused on environmental coverage – but happen to cover certain exposures – have been slower to address this risk. This article focuses on representations and warranties insurance (RWI).

Unlike an environmental insurance policy, RWI is tied to a breach by a seller of a representation stated in an acquisition agreement. Since PFAS has been lightly regulated at the federal level until now, PFAS-related risks needed to be covered by environmental representations and warranties instead of the more general "compliance with law" representations. Consequently, the scope of PFAS coverage depended principally on how the deal parties drafted the environmental representations. Environmental representations vary, but most buyers draft these representations to provide at least a compliance with law representation and a "no release of hazardous substances" representation, such as:

Except as [disclosed on the disclosure schedules], the (i) Company is and has been during the past [three (3)] years in compliance in all material respects with all Environmental Laws, (ii) there has been no release of Hazardous Materials at, on or from any location owned, leased or operated by the Company, and (iii) the Company has not released, handled, stored, generated, transported, distributed, designed, manufactured, repaired, installed, marketed, sold, recycled, disposed of, exposed any Person to Hazardous Materials.

"Environmental Laws" and "Hazardous Materials" are usually defined terms. In addition, "release" may be defined as well. In each case, the definitions serve to broadly define the concept and provide a non-exhaustive list of examples, such as the terms below:

Environmental Laws means any Laws relating to pollution or protection of human health or safety (as related to exposure to Hazardous Materials) or the environment, including those relating to (i) the protection, preservation, or restoration of the environment and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release, threatened release, distribution, testing, control, cleanup, manufacture, presence, export, import, abatement, removal, remediation or disposal of any Hazardous Materials. Such term includes the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. §§ 9601, et seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. §§ 6901, et seq.; the Clean Air Act, as amended, 42 U.S.C. §§ 7401, et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. §§ 1251, et seq. ... and state Laws addressing such matters, and all the rules, guidelines and regulations promulgated thereunder.

Hazardous Materials means any material, substance, waste, pollutant, chemical, emission, odor, heat, sound, vibration, radiation, dust, smoke, products, compound, particulate, or any derivative, or combination of the foregoing, that is listed, restricted or otherwise regulated, or that form the basis of liability, under Environmental Laws, and includes, for certainty, petroleum (or any fraction or constituent thereof), asbestos or asbestos-containing materials, toxic mold, polychlorinated biphenyls, greenhouse gases, fluorinated chemical substances, per- and polyfluoroalkyl substances, and any substance, compound or derivative which is defined under any Environmental Laws as "hazardous," "deleterious," "dangerous," "waste," "toxic," "pollutant," "contaminant," "radioactive," "harmful" or words of similar meaning.

The result is capture of specific environmental laws such as CERCLA as well as various other known environmentally problematic compounds that had not yet been declared a hazardous substance under those environmental laws. In recent years, it has become common to see PFAS included in this additional list of compounds such to unambiguously merit inclusion as a "Hazardous Material" for purchase agreement purposes, as exemplified above.2 Release of PFAS must be disclosed against any representation formulated in this manner; otherwise, any use of PFAS is a breach of the purchase agreement. In our experience, many sellers have not been paying close enough attention to their historical use of PFAS to fully disclose their PFAS use in a comprehensive manner necessary to satisfy this representation in a whole. This results in risk shifting to the RWI insurer.

Taft believes RWI insurers should look at PFAS with the same lens they once looked at polychlorinated biphenyls (PCBs) and asbestos. In both cases, the chemicals/products were already a ubiquitous part of daily life before environmental regulations banned or substantially limited their continued use and set forth standards for their remediation and removal. In both cases, the use of these products created a decades-long trail of litigation that has resulted in liability to not only the manufacturers of the compound but virtually every portion of the supply chain where these chemicals/products were eventually incorporated into final use (i.e., manufacturers of the putative compound/product, manufacturers who incorporated such compounds/products into their products, and retailers who have sold these compounds/products or compounds/products containing these compounds). Current PFAS legislation – and litigation – appears headed on much the same path as PBCs and asbestos.3

Taft knows of no RWI insurer that provides coverage for any loss arising from PCBs or asbestos regardless of the circumstance, yet some insurers are still willing to review PFAS on a case-by-case basis. The matters were not fully analogous until PFAS became a CERCLA hazardous substance, as RWI policies generally only cover environmental risks for a three-year period following the closing, and PFAS litigation is still in its infancy. That being said, the risks of PFAS use are well known at this point, and the EPA has now explicitly called out at-risk industries for regulatory action. The latest guidance is expected to spur some of those carriers still offering PFAS coverage on a case-by-case basis to reconsider that position. It is believed to be just one more step towards the exclusion of PFAS exposure from RWI as a market standard. Buyers and sellers alike will need to keep these trends in mind as they negotiate acquisition agreements with respect to targets that use (or historically used) PFAS.

Footnotes

1 Noting Lloyd's Market Association has offered industry-standard PFAS exclusion language since at least Aug. 5, 2022, LMA22-024-CM (lmalloyds.com).

2 We expect such inclusion will continue as the EPA's final order doesn't list all varieties of PFAS compounds that could be problematic.

3 See, e.g., Ambrose v. Kroger Co., 3:20-cv-04009 (N.D. Cal.), filed Jun. 16, 2020, and Nguyen v. Amazon.com, Inc., 4:20-cv-04042 (N.D. Cal.), filed June 17, 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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