Policies Shield Banks from Toxic Trouble: Insurance Policies Designed to Protect Borrowers and Lenders from Environmental Liability Abound. Do Banks Need Them?
Cocheo, Steve, ABA Banking Journal
It's not often that a single bank's decision to implement a new insurance policy makes headlines in the national business press. But that's just what happened when Rhode Island's Fleet Bank announced in June 1992 that all new and renewing commercial real estate borrowers with loans of more than $1 million would have to carry environmental liability insurance coverage.
It was thought at the time that the move would encourage many other lenders to adopt similar strategies. But almost a year and a half later, that hasn't occurred. Some lenders are selectively requiring borrowers to obtain environmental coverage. Other banks are obtaining coverage themselves, or are exploring the use of such policies for the sale or securitization of commercial properties or commercial real estate loanS.
Competition may explain why more banks haven't followed Fleet's lead. With loan demand down in many markets, bankers are loathe to watch a good credit cross the street to another lender who doesn't require coverage.
Yet some observers argue that customers shouldn't find an insurance requirement overly burdensome. For example, Ron George, director of product development for underwriter Proctor Homer Warren, Inc., says the presence of an insurance policy often makes borrowers' environmental indemnifications unnecessary, which pleases borrowers and their attorneys. George's firm, based in Troy, Mich., handles insurance offered by Empire Fire and Marine Insurance Co., Omaha.
For Fleet's part, a representative insists that it hasn't found its requirement to be an impediment to generating commercial real estate loans, though customer education was necessary. Also, Fleet borrowers can avoid making environmental guarantees in their loan arrangements if they obtain the insurance.
Another stumbling block is the relationship with the borrower itself. If the loan is already on the books, and the borrower isn't seeking a refinancing, the lender has no leverage with which to demand the borrower obtain coverage, points out Joseph May, a commercial lending consultant based in Farmington Hills, Mich. May was formerly chief credit policy officer at Comerica Inc., Detroit.
Nevertheless, many insurers say that lender and borrower interest in environmental coverage is growing.
DO YOU NEED THIS COVERAGE? Some might wonder if banks really need to explore the coverage. After extensive industry efforts, in April 1992 the federal Environmental Protection Agency issued revised regulations clarifying lender protections under the Superfund law--the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). At the time, the agency promised to make similar changes to regulations implementing the Resource Conservation and Recovery Act (RCRA), which covers leaking underground fuel tanks. And this year federal legislation was re-introduced in both the House and Senate to improve lender and trustee protections under both laws.
However, the EPA's RCRA revision is long overdue and the CERCLA revision, though in effect, is undergoing a court challenge. And, because the CERCLA revision does not apply to trustees, at least one federal court has held a bank acting as trustee liable for cleanup costs.
There are numerous other laws, including state laws, that impact banks' potential liability. And banks can still face liability under federal laws if sued by third parties.
And even if the lender itself believes it is insulated from environmental liabilities, a borrower driven out of business by the same risks leaves the lender with a bad credit.
SURGE IN PROVIDERS. A year or so ago, people who tracked this business generally named only three firms as providing the kinds of coverage that could help protect commercial real estate lenders from environmental risk. Among them were Environmental Compliance Services, Inc., Exton, Pa., and ERIC Group, Inc., Englewood, Colo. …