INSURANCE: Taking Environmental Cover

Joseph Catanese

Lenders and business owners alike often find the commercial lending process an arduous task. But environmental insurance can make the loan process easier.

When businesses want to purchase property, a leading concern among lenders is the environmental condition of the land. Many financial institutions have learned to exercise caution when lending on a property that might be contaminated or impaired. If a buyer defaults on a mortgage, the lender could be left with a costly cleanup. However, if a company has environmental insurance, a lender's concerns often are allayed and the lending process is streamlined.

To determine a property's risk and avoid costly cleanups, lenders have required loan seekers to perform a Phase I Environmental Site Assessment, which details possible hazardous property contamination. But this assessment is not a thorough investigation because there is no soil sampling, drilling, well monitoring or other underground examination. Instead, businesses use city records, property ownership records and historical aerial photographs to determine environmental risk. Certain conditions, such as the existence of underground storage tanks (USTs), clearly present a challenge during Phase I assessment because they were unregulated until fairly recently.

Because of Phase I's limitations, many businesses are turning to environmental insurance to quell lenders' environmental worries. Compared with a Phase I site assessment, lender liability policies may be less expensive and more time efficient. For example, a Phase I assessment typically can cost approximately $2,000 and does not guarantee that a loan will be granted. With an environmental policy, however, a company seeking financing can immediately address a lender's concerns about the environmental condition of a property, instead of taking several weeks to perform a Phase I assessment.

To protect financial institutions, many insurance carriers can provide lenders with environmental liability policies, which are growing in popularity as a lower-cost substitute and supplement to traditional environmental due diligence. This coverage is designed to protect against a default on a loan and undisclosed environmental liability issues. Insurance also provides protection against conditions disclosed by a Phase I assessment; conditions that appear during a loan's term; and third-party lawsuits, including defense costs. Policies typically pay for the cleanup or the outstanding loan balance.

Insurance providers should underwrite a lender's or business' environmental insurance program as they would any other policy. To do this, an insurance carrier may request a copy of the lender's environmental risk management procedures, loss history and any environmental documents pertaining to the land. An insurer will have the final decision of whether to take on a potential risk.

Environmental insurance is a good way for businesses to secure a loan more fluidly and allows lenders to avoid being left holding the (cleanup) bag.