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While traditional due diligence provides an owner with the minimum qualifications to qualify for the innocent-landowner defense to liability under the Comprehensive Environmental Response, Compensation and Liability Act, the approach lacks protection from unknown conditions, future release and third-party releases. Further, the most diligent environmental investigation cannot identify unknown conditions or abandoned and unrecorded infrastructures. It also cannot protect against future releases or transfer risk.
A new combined lender-insurance product with a traditional environmental-due-diligence component takes advantage of both approaches. The combined program uses an abridged Phase I environmental site assessment that an environmental professional conducts for the lender and buyer.
Transferring information electronically and streamlining the scope and format of the due-diligence component can shorten turnaround times. This results in combined product costs that compete well with traditional, stand-alone due-diligence methods.
The combined program embraces the concept of graduated due diligence. The due-diligence report is submitted to the lender and the insurance underwriter for review. If they discover conditions that disqualify the deal for inclusion in the insurance policy, the lender may continue down the traditional due-diligence path.
Or the lender can walk away from the deal, having invested only a fraction of the costs associated with a standard Phase I assessment. The deal can be reconsidered for inclusion in the program if upon discovery of mitigating information.
The combination of traditional environmental due diligence and lender insurance provides a standard of risk management that may satisfy the desires of both lenders and brokers. Brokers are no longer forced to struggle between looking out for the interests of each.
Additionally, the added due-diligence component results in more loans approved for insurance coverage than through the traditional insurance-underwriting methods. The environmental professional can provide greater comfort to the underwriter by providing physical site characteristics and an interpretation and analysis of potential risks and site conditions. This greater level of information lets the insurance carrier reduce premium costs by avoiding adverse selection of properties.
Mark Fackler is the president of AZLAND Risk Management, headquartered in Louisville, Ky. Working directly with lenders, Fackler has more than 15 years' environmental-consulting experience in providing due diligence, educational outreach and training regarding environmental- and property-risk-management procedures and policies. AZLAND is the due-diligence provider for the Combined Insurance Program and provides chemical management, physical-needs assessments and environmental-risk-management services for the real estate and lending industries. Contact Fackler at (888) 483-4264 or email@example.com.
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