As published in Scotsman Guide's Commercial Edition, April 2008.
Like any business professional, mortgage bankers and mortgage brokers face many challenges in trying to meet their strategic objectives. They must balance growth with regulatory issues, meet shareholder demands and assess the impact of assuming risk.
An additional challenge that commercial loan officers, loan committees and mortgage brokers face is how to handle known or perceived environmental liabilities associated with commercial properties. These liabilities pose issues that require maintaining the cost of environmental due diligence while preventing the loss of collateral value. The way environmental liabilities are handled helps determine whether a deal closes.
One way borrowers can address these environmental liabilities is with environmental insurance. Although it is often overlooked, this insurance provides benefits not found with traditional environmental-due-diligence methods -- such as Phase I environmental site assessments and environmental questionnaires -- that only help to assess historical issues while the lender retains the risk of environmental loss.
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Of course, all parties to a commercial transaction should conduct the appropriate environmental due diligence to ensure they understand and protect their interests. Many, however, are not aware that environmental insurance and the underwriting process associated with such coverage in some cases is acceptable environmental due diligence. Environmental insurance also can offer benefits not found with other processes.
Generally, two types of coverage can address the environmental liabilities associated with a commercial transaction: lender's environmental-liability insurance and environmental-site liability insurance. Because lenders are more likely to close environmentally risky deals when there's environmental insurance in place, it's helpful for brokers to educate their clients on these policies.
Lender's environmental-liability insurance is coverage in which the lender is named as the insured but the borrowers pay the premium. The coverage is written specific to the loan and underlying collateral property. It is designed to address two major lender concerns regarding environmentally impaired properties -- potential environmental liability and compromise of collateral.
Some typical components of this policy type include the following:
When a pollution condition accompanies a default, the policy generally pays the lesser of the cleanup cost or the loan balance.
When a pollution condition accompanies a foreclosure, the policy pays for the cleanup cost.
Coverage provides indemnification to the lender for bodily injury and property-damage claims alleged by third parties and also provides for legal defense to handle these claims.
Lender policies are generally assignable to other commercial lenders, which can facilitate the sale of loans.
Policy terms sometimes can last for as many as 20 years.
Lender's environmental-liability policies can be written on either a single-site or a portfolio basis. On a single-site basis, the lender typically wants to use the coverage on deals in which its traditional due-diligence methods have shown past or current pollution conditions. The insurance can transfer the environmental risk for those particular deals.
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