Phase I Environmental Site Assessment: What It Is and Why It Matters

When evaluating a property for purchase, development, or refinancing, one of the most critical steps is understanding its environmental history. A Phase I Environmental Site Assessment (ESA) helps identify potential contamination risks that could result in costly cleanup obligations. Owners and Buyers view an ESA as a due diligence tool, and Lenders require it to help underwrite a loan.

This guide will break down the Phase I ESA process, explain its significance in environmental risk management, and illustrate how these assessments can provide clues for insurance archaeologists like us to track down historical policies and fund cleanup efforts.

What Is a Phase I Environmental Site Assessment?

A Phase I ESA is an important tool when evaluating environmental risks associated with a property. It is designed to identify Recognized Environmental Conditions (RECs)—indicators of past or present contamination that could affect the subject property and adjacent properties’ value, present environmental liabilities, and inhibit future use. Conducted according to ASTM E1527-21 standards, a Phase I ESA provides a “Desktop Review”, an in-depth historical and environmental review through paperwork and a site inspection, but without any subsurface soil or groundwater testing.

Lenders typically require a Phase I ESA before financing commercial or industrial properties, buyers, and real estate developers to assess environmental risks before purchase, and government agencies when overseeing property redevelopment, providing grant funding, or regulatory compliance.

The Purpose of Phase I Environmental Site Assessments

A Phase I ESA is more than just a regulatory requirement—it is a powerful risk management tool that serves three key functions:

1. Identifying Environmental Risks: A Phase I ESA investigates whether a property’s past use has led to contamination risks that could affect its value, development potential, or regulatory compliance. Common concerns include:
   1. Historical industrial operations that may have resulted in soil or groundwater contamination.
   2. Underground storage tanks (USTs) that could have leaked hazardous substances.
   3. Dry cleaning or manufacturing activities known to involve toxic chemicals.
2. Protecting Against Legal Liability Under CERCLA: One of the most critical functions of a Phase I ESA is to fulfill the “appropriate inquiry” requirement under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), Innocent Landowner Defense. Buyers who conduct an appropriate inquiry before acquiring a property may qualify as Bona Fide Prospective Purchasers (BFPPs), meaning they can acquire contaminated property without being held liable for past pollution, provided they meet all federal compliance requirements.
   • This is why working with a qualified environmental consulting firm is essential when conducting a Phase I ESA. 
   • Phase I’s have been commoditized, and it is common for a consultant to be hired based on delivering fast and inexpensive reports, which often lack the depth and care to identify significant risks on a property with a complex history. 
   • A poorly executed Phase I can expose buyers to unforeseen liabilities, making expertise and thoroughness far more valuable than a low price.
3. Ensure Regulatory Compliance: A requirement of most lenders, government agencies, and institutional investors, Phase I ESAs help demonstrate that a transaction will not require additional environmental considerations.
   • Lenders use Phase I ESA reports to confirm the property is not subject to environmental liabilities that could impact loan security.
   • Developers may need a completed Phase I ESA to satisfy equity partners before acquisition and investing additional monies for entitlements.
   • Regulatory bodies view the Phase I ESA as proof that environmental risks are adequately evaluated and managed.
4. Facilitate Property Redevelopment: Especially important for sites with industrial or commercial histories, Phase I ESAs help identify contamination risks that could interfere with project planning and execution.
   • Environmental findings can inform budgeting, design, and timeline decisions for remediation and development.
   • Early identification of risks can help secure approvals from planning departments and environmental agencies.
   • Phase I ESA documentation may support applications for brownfield grants, tax incentives, or environmental liability protections.

Understanding the Phase I ESA Process

A Phase I ESA follows a structured process to evaluate potential contamination risks consisting of four key steps:

Step 1: Records Review

The consultant thoroughly examines historical and regulatory records to determine whether past land uses may have contributed to contamination. This includes:

• Aerial photographs: Reviewing decades of aerial imagery to track land use changes.
• Sanborn fire insurance maps: Mapping historical buildings and industrial operations.
• City directories: Identifying past tenants and businesses that may have used hazardous materials.
• Environmental database searches: Checking for records of spills, leaks, or regulatory violations at the subject property AND adjacent properties
• Property deeds and historical land use reports: Understanding ownership history and past uses that could indicate contamination.

Step 2: Site Inspection

A trained environmental professional visits the property to assess visible signs of contamination or environmental risks. The site inspection includes:

• Visual inspections examining the grounds, buildings, and surrounding areas for signs of spills, chemical storage, or improper waste disposal.
• Identifying the presence of underground or aboveground storage tanks (USTs and ASTs).
• Noting stained soil, stressed vegetation, or unusual odors that could indicate contamination.

Step 3: Interviews

Consultants interview individuals who may know the property’s environmental history, including current and past property owners, long-term tenants, employees, local government officials, and environmental regulators.

Step 4: Report Findings & Conclusions

At the conclusion of the Phase I ESA, a final report is issued outlining a summary of Recognized Environmental Conditions (RECs), an evaluation of potential contamination risks, and recommendations for further investigation, such as a Phase II assessment (which involves soil and groundwater testing).

What Constitutes a Recognized Environmental Condition (REC)?

According to the EPA a REC as defined in ASTM 1527-13 means the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a materials threat of a release of any hazardous substances or petroleum products into structures on the property or into the ground, groundwater, or surface water of the property. The term includes hazardous substances or petroleum products under conditions in compliance with laws (e.g., permitted discharges). This includes:

• Existing contamination known to be present in soil, groundwater, or structures.
• Past contamination events that were improperly remediated or left unresolved.
• A significant likelihood of contamination based on historical records, site inspection findings, or interviews.
• Known or suspected contamination on adjacent or nearby properties may have migrated onto the subject site or pose a future risk.

Identifying a REC does not automatically mean the property is contaminated. Still, it indicates a need for further investigation—potentially triggering a Phase II ESA involving soil and groundwater testing.

Common Examples of RECs

The following are frequent RECs uncovered in Phase I ESAs, many of which directly relate to historical insurance claims:

• Underground Storage Tanks (USTs): Older gas stations, commercial properties, and industrial sites often had buried fuel tanks that may have leaked hazardous substances into the soil and groundwater.
• Industrial Waste Disposal: Properties that once housed factories, metal plating facilities, or dry cleaners may have dumped toxic chemicals on-site, leaving behind contamination issues.
• Hazardous Material Storage: The long-term presence of paints, solvents, petroleum products, or other hazardous substances can lead to lingering environmental contamination even after business operations cease.
• Historical Land Use Records Indicating High-Risk Activity: Sanborn fire insurance maps, city directories, and aerial photographs may reveal prior land use patterns that suggest contamination risks.
• Regulatory Violations or Cleanup Orders: Properties with a history of Environmental Protection Agency (EPA) or state environmental agency violations are strong candidates for insurance recovery efforts.
• Area-Wide Contamination: In some cases, contamination originates beyond the subject property’s boundaries and migrates onto the site. This can include groundwater plumes, vapor intrusion from off-site sources, or airborne pollutants such as fallout from smelters, foundries, or manufacturing plants. Even if the property has no history of hazardous activities, its proximity to contaminated sites can pose environmental and financial risks.

What Happens After a Phase I Environmental Site Assessment?

Once a Phase I ESA is complete, the next steps depend on whether the assessment identifies potential environmental contamination or RECs.

Scenario 1: No Environmental Concerns Identified

If the assessment finds no evidence of past or present contamination, the property is considered low environmental risk, and transactions can typically proceed without additional environmental due diligence. Lenders, buyers, and developers can move forward with financing or redevelopment without fear of unexpected cleanup obligations.

Scenario 2: Potential Contamination Identified

Further action is needed when a Phase I ESA raises concerns about possible contamination. This may include:

• Conducting a Phase II ESA to investigate if there is contamination in the soil, groundwater, or air. This can involve subsurface drilling, groundwater, and air sampling to determine the extent of contamination.
• Developing a remediation plan with environmental consultants and regulatory agencies to create a cleanup strategy.
• Notifying regulatory agencies if the findings trigger mandatory reporting to local, state, or federal environmental authorities.
• If a Phase II ESA confirms contamination, property owners must decide how to proceed with cleanup, regulatory compliance, and financial planning.

How Environmental Site Assessments Play a Role in Insurance Archaeology

A Phase I ESA does more than identify contamination risks—it also provides a historical record that can help property owners identify former, liable parties who may have had insurance policies for these present-day environmental cleanup costs. Many commercial properties are insured under older general liability policies that, if located, may provide coverage for remediation expenses. However, these policies are often victims of time and have been lost, forgotten, or destroyed. This is where an insurance archaeology firm comes in.

Using Phase I ESA Findings to Identify Insurance Coverage

A Phase I ESA documents a property’s past use and any potential environmental hazards. This information is essential for identifying potential policyholders who were associated with the property (owners or operators) in the past. Each of these policyholders and their historical insurance policies is a potential funding source that might help cover remediation costs. Key details from a Phase I ESA that aid in insurance recovery include:

• Property ownership history: Helps determine which past owners or tenants may have been associated with the property during historical periods when pollution occurred.
• Historical land use records: Identifies past operations that could trigger coverage under pre-1986 general liability policies, which may not contain an effective pollution exclusion. 
• Regulatory reports and environmental concerns: Strengthen claims by demonstrating that contamination is linked to historical activities rather than new environmental issues.

By analyzing these records, insurance archaeologists can pinpoint which policyholders may have purchased historical insurance policies that may provide coverage for remediating historical contamination. If the contamination can be linked to a period when a general liability policy was in place, the insurers can be held responsible for covering soil and groundwater cleanup costs, regulatory fines and legal fees, site remediation, and environmental consulting services.

A Phase I Environmental Assessment Can Save You Millions in Cleanup Costs

A Phase I ESA is vital for identifying environmental risks, protecting property owners from liability, ensuring regulatory compliance, and facilitating property redevelopment. Additionally, if the site is contaminated, Phase I is a valuable tool for insurance archaeologists and a significant data point in obtaining coverage under historical insurance policies to fund environmental remediations.

Rather than property owners shouldering significant cleanup costs alone, or getting bogged down in lengthy litigation with PLPs, working with the insurance archaeologists at Restorical Research can help unlock funding that would otherwise go unnoticed. Reach out today to explore whether historical insurance coverage could provide the financial relief you need.