January 1, 1900

by Nielsen V. Lewis

By the nature of their operations, automobile dealerships experience significant environmental concerns, including potential liability for accidental discharges of hazardous substances into the environment. The risk of such discharges depends upon the nature and scope of each dealer’s operations. Discharges may result from parked automobiles; the storage and use of products containing hazardous chemicals, such as solvents and lubricants; the storage and use of gasoline and other petroleum products; the on-site fueling of automobiles; automobile maintenance, service and repair operations; body shop and painting activities; and waste handling and disposal practices, to name some areas of concern.

Tough New Jersey Environmental Laws

Environmental risk is no small matter. New Jersey is home to one of the toughest sets of environmental liability laws and enforcement programs in the nation. Key environmental statutes of concern to dealerships include the Spill Compensation and Control Act (Spill Act), the Underground Storage of Hazardous Substances Act (USHS Act), the Water Pollution Control Act and the Solid Waste Management Act and related regulations. The Spill Act prohibits discharges of hazardous substances without a permit and imposes strict liability, without regard to fault, on persons "in any way responsible" for discharges for the costs of cleanup and restoration of injured natural resources. More recently, the USHS Act was enacted to prevent, control and abate groundwater contamination caused by leaking underground storage tanks (USTs). Implementing regulations impose the following requirements upon owners and operators of USTs: detailed registration; design, construction and installation; operating; release detection; release reporting and investigation; remediation; and tank closure. Many car dealerships have at least one UST posing the risk of leaks or discharges. Spill Act and USHS Act regulations require prompt reporting of unauthorized discharges of hazardous substances to the New Jersey Department of Environmental Protection (NJDEP), which is the administrative agency charged with administering and enforcing state environmental laws.

Liability for pollution resulting from improper waste disposal practices is another area of concern for car dealerships. Regulations implementing the Solid Waste Management Act set forth detailed requirements for proper waste management and disposal, including a "cradle to grave" manifest system for tracking shipments of solid and hazardous wastes to their final resting place. Moreover, the Water Pollution Control Act and related regulations establish the rigorous New Jersey Pollution Discharge Elimination System (NJPDES) permitting program controlling discharges of treated effluent into surface and ground waters.

The legal consequences of an unauthorized discharge of a hazardous substance can be severe. Enforcement sanctions may include stiff penalties; revocation of storage tank and waste discharge permits; court action by the regulators seeking injunctive relief and damages; and even criminal action.

Under the Spill Act, NJDEP may recover three times the State’s costs of cleanup (known as a "treble damages" sanction) if a responsible party fails to obey a cleanup directive, necessitating the use of public funds to do the job.

To reduce the risk of environmental pollution and liability under New Jersey law, dealerships are well-advised to have in place an environmental risk management program designed to prevent, detect, control and abate unintended hazardous substance discharges in their operations. Three "best practices" risk management tools available to automobile dealers for this purpose are: (1) compliance with NJDEP pollution prevention and control regulations implementing the Spill, USHS, Solid Waste Management and Water Pollution Control Acts; (2) the use of internal environmental audits; and (3) procurement of insurance shifting the risk of environmental mishaps and liability to insurers.

NJDEP Pollution Prevention Regulations

For guidance concerning sound pollution prevention practices, one needs look no further than NJDEP’s own regulations. In particular, N.J.A.C. 7:1E (Technical Requirements For Site remediation) and N.J.A.C. 7:14B (Underground Storage Tanks) provide a road map to NJDEP’s concept of good hazardous substance storage, transfer and disposal practices and effective pollution prevention and control measures. Automobile dealerships can reduce their environmental liability exposure by knowing and adhering to specific standards and procedures in these regulations.

Internal Environmental Audits

Another useful risk management tool is the judicious use of internal audits of operations to assess environmental risks, the effectiveness of risk management practices, and any omissions, deficiencies or required changes. In connection with property transfer and financing transactions, environmental audits commonly are performed in two phases-Phase I ("Preliminary Assessment") and Phase II ("Site Investigation"). Normally, Phase I involves visual inspection of the property and operations accompanied by site interviews and a review of records to determine whether there are potentially contaminated areas of concern. If areas of concern are identified, a Phase II investigation, including soil and possible groundwater sampling and analysis, is performed to determine whether contaminants are actually present above "action levels" requiring cleanup. Guidelines for conducting site assessments are published by the American Society for Testing and Materials (ASTM) and in NJDEP’s Technical Regulations. Such audits should be modified as appropriate to assess ongoing operations. Businesses lacking the resources to conduct environmental assessments may employ qualified outside consultants.

The use of environmental audits follows the adage "an ounce of prevention is worth a pound of cure." The purpose is to uncover and address environmental problems before they occur or get out of hand. Periodic environmental audits can play an important role in managing dealership operations to maximum pollution prevention and minimize potential liability for unintended discharges.

Liability Insurance

Even the best environmental risk management program will not always protect dealers from pollution liability. What if hazardous substance discharges occur despite the best of intentions? Liability insurance can be an integral component of an effective risk management program to deal with the "what ifs." In return for a premium payment, an insurance policy is issued shifting at least part of the environmental liability risk from the insured to the carrier. Two types of insurance may be useful here. The first is a comprehensive general liability (CGL) policy insuring against liability for environmental property damage caused by accidental discharges of pollutants; generally such coverage is limited to discharges occurring before 1986, when most policies adopted an "absolute" pollution exclusion. Importantly, these policies do not "expire" as one might expect; a tattered CGL policy issued years ago may cover pollution discovered tomorrow if its source lies in discharges occurring before 1986.

For other discharges, special environmental impairment insurance products tailored to specific sites are available to insure against future environmental accidents or discharges. Examples of such products include pollution legal liability, property transfer and cleanup stop gap policies. The availability and scope of such insurance ordinarily depends on the results of a site audit by the insurer to establish baseline environmental conditions. While these policies are more expensive than the CGL policy, they spread the risk of liability for future hazardous discharges, providing peace of mind for dealers who wish to concentrate on the business of selling automobiles.

Conclusion

Implementation of an integrated environmental risk management program can be a prudent investment in pollution prevention and reduction of environmental liability exposure. The nature and scale of the program will be shaped by the particular operations and site conditions of each dealership, in consultation with experienced consultants or professionals as needed.

Nielsen V. Lewis is a partner of the firm where he is a partner of the Environmental Practice Group and a member of the Land Use Division. He concentrates his practice in the areas of environmental law, insurance law and land use, with an emphasis on prosecuting and defending complex environmental litigation.