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What's a Lender to Due

John Farinacci

March 2021

Entities that hold mortgages on property as secured lenders face the issue of known, perceived or future environmental contamination at a collateral property. While many lenders perform some level of environmental due diligence to address this risk, often used methods such as a Phase I Site Assessment or environmental database review fall short on delivering an effective solution to help lenders truly address their risk. This white paper explores the benefits of establishing an appropriate Environmental Risk Management Program and utilizing Lender Environmental Insurance as an efficient option to protect assets and transfer liability.

Avoiding Delays Due to Environmental Concerns

A commercial lender completed a Phase 1 report for a property that revealed one recognized environmental condition. In lieu of opening the ground to address the condition, the lender preferred to secure an environmental insurance policy to protect their collateral.

They had already received a quote from a different carrier, but the terms were unfavorable and the premium high relative to the existing status of the property. They reached out to our team for an alternate solution. We had the Phase 1 reviewed by our environmental consultant on retainer, and submitted the account for quoting with a request for various term and limit options. The single site lender insurance quotes we delivered offered more favorable terms that provided the lender with the coverage needed. Post binding, we were also able to meet their request to add an additional insured on the policy in the tight timeline the lender needed to complete the deal.

Abandoned Tank on a Construction Project

A commercial lender was providing a loan for a construction project. The Phase 1 report on the property revealed an abandoned oil tank in the ground, which gave the lender some concern. Abandoned oil tanks can have significant risk of leaks, and the resulting soil contamination cleanup is costly and can cause further damage.

Instead of pulling out of the loan, the lender approached our team for coverage. We were able to assist the lender in obtaining a single-transaction policy, which gives them protection should environmental damage occur from the abandoned tank, or in the event of a future pollution incident. With the environmental policy in place, the lender funded the loan, and the deal was able to go through. Discoveries such as abandoned oil tanks don’t have to stop deals from closing.

Coverage Saves Lender $800,000

The lender, a credit union, had originated a loan with a local car dealer. The credit union had a lender environmental portfolio policy in place and the loan was added to the policy for a premium around $2,200. The loan was fully amortizing and midway through the loan term, the borrower ceased making principal and interest payments. Subsequently, the loan went into default.

During default and prior to foreclosure pollution conditions were discovered. Policy coverage was triggered as there was now a default accompanied by a pollution condition. It was determined by the carrier’s investigation that the cost of clean-up was greater than the loan balance; therefore, the lender received a payout equal to the loan balance of $800,000.

Former Gas Station Revealed During Refinancing

Owners of a retail center were looking to refinance their existing loan. A Phase 1 report and historical records revealed that a gas station had formerly been on the site where the retail center now was. The tanks had been removed, but there was still the potential of a previously undiscovered pollution incident being found.

The lender wanted to close the loan within a week so we knew we needed to move quickly. Additionally there were some challenges related to the financial history of the borrowers. Leveraging our experience and market relationships, we were able to find a carrier whose appetite could address these needs. Knowing the right questions and information to gather from the owners helped in premium negotiations with the underwriter. The loan ended up closing and the policy was bound. The lender was satisfied with the smooth process and was happy to know their financial interest in the property is protected in the event of a pollution incident.

Quick Turnaround on a Single Site Deal

A commercial lender sought to obtain site pollution liability coverage for a single site within an urgent turnaround time. They needed to close in less than a week, and they could not move forward until they fulfilled their due diligence. They had completed a Phase 1 report and discovered additional insurance was needed.

After reviewing the report, we were able to promptly provide quotes that fulfilled the lender’s needs, including onsite cleanup for both new and pre-existing conditions, third-party pollution liability and a five-year policy term to cover the length of the loan.

The lender was able to choose a quote that fulfilled their needs in time for closing. Additionally, they are now protected against the loss of collateral value and have coverage should a discovery of a pollution condition occur at one of their owned properties.