Contractors Are Being Too Liberally Indemnified by the Government

RCED-89-160: Published: Sep 26, 1989. Publicly Released: Sep 26, 1989.

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Pursuant to a legislative requirement, GAO reviewed the Environmental Protection Agency's (EPA) Superfund Amendments and Reauthorization Act of 1986 (SARA) Section 119 program for indemnifying Superfund program contractors and subcontractors against liabilities caused by negligence, focusing on: (1) the use of and need for indemnification agreements; (2) claims against those agreements; (3) the program's compliance with applicable laws and regulations; and (4) program management.

GAO found that: (1) as of June 1989, EPA had provided over 1,000 indemnification agreements to Superfund prime contractors and subcontractors, most of which worked directly for EPA; (2) EPA did not grant indemnification to any contractor working directly for parties responsible for the contaminated sites; (3) while no claims had been filed against any of the indemnification agreements, many years could pass before pollution was detected and a claim brought against the alleged polluter; (4) most private insurers generally regarded pollution risks as uninsurable, although three insurers provided some limited-coverage pollution insurance for cleanup contractors; (5) although several contractors cited their reluctance to perform Superfund work without indemnification, some of them had performed Superfund work for states and responsible parties without indemnification; (6) EPA provided indemnification free of charge; (7) EPA did not fully comply with requirements to provide indemnification on a discretionary, case-by-case basis, and did not enforce guidance procedures for granting indemnification; (8) EPA did not set limits on the amount of contractor indemnification; and (9) the EPA contractor for providing section 119 policy support was a direct beneficiary through two major indemnified Superfund contracts.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In a few months, GAO will issue a report to Congress on EPA actions on the old report.

    Recommendation: Because SARA section 119 established specific statutory authority to indemnify Superfund response action contractors, the Administrator, EPA, should advise federal agencies to use section 119 rather than general contracting authorities if they choose to indemnify Superfund contractors.

    Agency Affected: Environmental Protection Agency

  2. Status: Closed - Implemented

    Comments: In a few months, GAO will report to Congress on EPA actions in response to the indemnification report.

    Recommendation: To limit the government's potential exposure to liabilities caused by contractor negligence and keep qualified contractors working in the Superfund program, the Administrator, EPA, should: (1) identify and test, through the procurement system, options for providing section 119 indemnification that will make it competitively unattractive for Superfund contractors and subcontractors to obtain more indemnification than is needed; and (2) incorporate the options that are most cost-beneficial to the government into the regular Superfund procurement process.

    Agency Affected: Environmental Protection Agency

  3. Status: Closed - Implemented

    Comments: In a few months, GAO will report to Congress on EPA actions responding to the indemnification report.

    Recommendation: To encourage the development of pollution liability insurance for response action contractors and limit dependence on federal indemnification, the Administrator, EPA, should implement management controls for the section 119 indemnification program that will ensure that: (1) the insurance requirements in SARA are strictly enforced; and (2) indemnification decisions are made on a discretionary case-by-case basis, as Congress intended.

    Agency Affected: Environmental Protection Agency

  4. Status: Closed - Not Implemented

    Comments: EPA does not plan to implement this recommendation because it would require renegotiation of existing agreements and development of an interim policy. EPA is currently developing a policy to be promulgated with its final indemnification policy.

    Recommendation: To avoid unnecessary exposure of Superfund while EPA section 119 guidance is being developed, the Administrator, EPA, should attempt to reach an immediate agreement with contractors indemnified under the interim program to place a specific limit on the amount of indemnification they are being provided and specify a limit in indemnification agreements provided under the interim program for new contracts.

    Agency Affected: Environmental Protection Agency


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