Environmental Insurance: There are many types of policies that protect against environmental liabilities. At Financial Specialty, we focus on those which have greatest applicability to commercial real estate. Within this area, there are two main policy types sold: one which provides lender protection, and another which provides owner/borrower protection.

Lender Protection
Policies which protect the lender come under a variety of names. Some of the variants are Secured Creditor, Collateral Impairment, Loan Balance and "Lesser Of". The feature that these have in common is that coverage is triggered by monetary default under the loan, combined with the presence of environmental contamination in excess of current permissible limits. The default and contamination are considered "dual triggers" in that both must have occurred in order to trigger payment under the policy.

If the policy is triggered, the Loan Balance type form will pay the lender the unamortized balance of the loan, and eliminates the need for the lender to foreclose on the property or clean it up. Lenders prefer this type of policy form because it keeps them out of the chain of title. Upon payment by the insurer, the lender transfers its rights under the mortgage to the insurer and is then out of the loop. However, this policy is increasingly difficult to obtain.

A more readily available lender protection policy is known as the "lesser-of" form. Similar to the Loan Balance form, it is triggered by the simultaneous occurrence of monetary default and contamination at the site. However, instead of paying the lender the unamortized balance of the loan, it will pay the lesser of the cost to clean up the contamination or the unamortized balance of the loan.

This approach is less desirable from a lender’s standpoint since it may wind up in the chain of title, depending on the circumstances of the claim. However, this policy is less expensive than the Loan Balance form.Common exclusions in all environmental policies are for mold and asbestos. These coverage exclusions can be bought back subject to acceptable review of requested underwriting information.

Mold coverage is not normally sold as a stand-alone product but is included in with the definition of environmental impairment.The policies are written for terms of up to 20 years. Premium is a one-time payment collected at inception and is non-refundable because the policy may not be cancelled by either party to the contract. The limit of the policy and basis of the premium is the loan amount to be insured and may be as much as $100,000,000, although as a practical matter, loans much in excess of $50,000,000 are rarely insured.

Owner / Borrower Protection
Policies which protect an owner of real estate also come under a variety of names, mainly to distinguish the providers of these products. The most common are Pollution Legal Liability (PLL) and Environmental Site Liability (ESL). Both accomplish essentially the same purpose. Depending on coverages selected, the policies can insure against cleanup of contamination in excess of current standards, as well as protect against third party liabilities resulting from that contamination. Coverage can be extended to cover off-site, which is valuable if the contamination has migrated to a neighboring property. The basic policy will cover against pre-existing, unknown contamination at the site, as well as contamination that develops in the future. Third party liabilities associated with known, existing contamination can also be covered in certain circumstances.

Term
Policy terms of up to 10 years are available. The long term can be a valuable feature, as coverage is triggered by violation of then current standards. So, if environmental regulation of a substance becomes stricter in the future, an existing contaminant which is currently at acceptable levels may have to be remediated to the newer standard. A good example of this is asbestos, which at one time was thought to be benign. Now, asbestos must be removed or addressed in other ways to mitigate exposure to the public. So a prudent property owner will want to consider environmental coverage even if there is little or no known contamination at his property, according to today’s standards.

Limits, Deductibles and Pricing
Limits of up to $100,000,000 are available, and a minimum deductible of $5,000 is required. As a practical matter, the high limit and low deductible are not available, and would not be cost effective if they were. We will try to guide you to the best use of your premium dollar by working with you to assess your tolerance for risk and balancing that with realistic expectations of the level of loss a given property might generate. There is no "rule of thumb" rating guideline that will generate anything more than misinformation. The best way to get a handle on cost is to talk with us about the risk you want to insure and let us do some homework. With some ballpark terms in hand, you can determine whether it’s worth your time to proceed with obtaining firm terms.

Underwriting Requirements
Generally, it is required to have a Phase I site assessment available. Some carriers can do an internal database search to see if the site has been reported to environmental authorities as having had contamination and will use that method instead of a Phase I. There are plusses and minuses for each approach, and sometimes you don’t get a choice. The best option for you will be dependent on the risk, and we will be happy to provide you with ideas on which way to go.