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Environmental Business Grows As More Buyers Bypass Surveys

December 16, 2002

Suszynski, Marie, "Environmental Business Grows As More Buyers Bypass Surveys."  Best Week 16 Dec. 2002

Environmental Business Grows As More Buyers Surveys

Ever since general-liability policies began excluding environmental losses in the mid-1980s, environmental insurance has been on the rise. Today, many property buyers are using the insurance to secure current, low-interest loans, but one critic predicted a backlash against the insurance once buyers get hit with millions of dollars in contamination expenses.

"The whole concept of environmental insurance probably seemed like an oxymoron until not too long ago," said Stuart Miner, cofounder and vice president of LandBank Group Inc., a company that provides insurance packages for environmentally impaired property.

In the past, the risks were covered under general-liability policies, but standard issurers moved away from covering environmental liabilities in the 1980s because they never anticipated the magnitude of the claims, Miner said. Around 1986, insurers began using an absolute pollution exclusion to bar all environmental losses.

Just five years ago, about 5,000 properties were being underwritten for environmental coverage, according to Charles Perry, president of Environmental Warranty, an underwriter based in West Hartford, Conn. But he estimates that next year, 100,000 to 200,000 policies will be written.

Environmental Warranty underwrites environmental policies for Chubb Corp. and acts as a broker to other insurers in the market, such as Zurich North America and American International Group Inc., he said. "We have a vision of the insurance becoming the environmental equivalent of title insurance," he said. Other companies that offer the insurance include XL Environmental and Ace Casualty Risk, which just recently created a new environmental and casualty underwriting unit.

Perry's product protects lenders from potentially unknown environmental liabilities. But other companies, such as Zurich, offer products designed for lenders, buyers or both.

Although it's controversial, some buyers even are skipping a common test called a Phase 1 environmental survey that investigates the property for environmental contamination and makes the lender feel more comfortable about approving a loan. Instead, they're opting for environmental insurance as a replacement to speed the loan process and secure low interest rates.

The difference can be a month or longer, Perry said. A Phase 1 survey generally takes about 30 days, and then the lender could take another two weeks to review it. When buyers approach a lender with an environmental insurance policy in hand, the loan usually can be turned over in one to three days.

Speed is a plus to the borrower in today's low-interest-rate environment, but it's also important to lenders. "Speed is an advantage to the lender if they're competitively going after a deal," Perry said. In addition, the insurance allows lenders to make a transaction better by identifying and isolating risk and getting rid of it. That's why some lenders actually are seeking out the insurance.

In addition, Perry said the insurance benefits borrowers by being cost efficient. Both a survey and an environmental insurance policy cost between $1,800 and $3,000. But unlike an environmental survey, there's no charge to the borrower for the insurance unless a loan closes. However, if a borrower pays for an environmental test and the lender refuses the loan for any reason, the borrower can't reuse the Phase 1 report and loses the money spent on it.

But some say skipping the test altogether is a major mistake. Along with underwriting environmental risks, LandBank also buys environmentally contaminated property, cleans it up and resells it. As a buyer, Miner said he wouldn't skip an environmental test because he wants to know everything he can about the environmental history of the site.

Another problem with the policies is their exclusions, said Kenneth Gold, a buyers' attorney with Detroit-based Honigman Miller Schwartz and Cohn. He advises his clients against skipping the environmental test and relying on insurance because deductibles and limits to coverage force the policy holder to retain a fair amount of risk, he said. Properties can cost several million dollars to evaluate and clean up once they've been contaminated. In addition, buyers who rely solely on insurance might lose the right to assert legal defenses against liability.

However, when dozens of properties are involved in a transaction, some buyers might perform less due diligence and couple it with insurance to avoid paying dozens of fees for the Phase 1 surveys, he said.

Perry admitted that most of the policies exclude mold and asbestos and lead paint in the structure, but they typically cover asbestos and lead paint in the soil or groundwater. "The real substance to the policies is what you can't see or find easily," Perry said.  A building inspection easily spots lead paint or asbestos but can't tell what's six feet under the ground.

David Jung, vice president of Zurich's environmental specialty profit center, noted that a Phase 1 survey is a limited investigation of the site and might overlook potential contamination. Without the insurance, the lender or buyer is left without protection.

Zurich offers three types of environmental insurance: lender liability policies, which protect banks' collateral value if the property becomes contaminated; real estate policies, which are designed for buyers and cover clean-up of pre-existing contamination; and a policy for both lenders and buyers.