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Shopping Centers Today -> March 2003
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WILL LENDERS MANDATE ENVIRONMENTAL INSURANCE?
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| Bill Lynott |
LandBank faced a potentially costly situation after buying the 123,000-square-foot Northeast Plaza, Sarasota, Fla. The solvents from a dry cleaner had contaminated the three-acre site’s soil and groundwater.
Luckily, Lakewood, Colo.-based LandBank, which buys brownfield properties to resell or hold, had protected itself with a $1 million environmental insurance policy that covered the initial expenses and with a $5 million, 10-year term policy that locked in the cost of correcting future problems.
More commercial real estate companies are protecting themselves the same way. Premium volumes grew to $1.6 billion in 2002, up from $1.2 billion in 1999, and some expect to see about $1.8 billion spent on premiums for such environmental policies this year, said Priscilla McCoy, LandBank’s director of risk management.
Eventually, lenders will insist on this coverage before they’ll approve commercial mortgages, observers say.
“My guess is that probably in about two years or less, commercial real estate [mortgage] transactions won’t go to closing without this in place,” said Charles Perry, president of Environmental Warranty, a Hartford, Conn.-based insurance brokerage firm.
Already, environmental insurance has become a component of commercial property finance much as title insurance has, said Perry. Environmental Warranty underwrites for Chubb Group of Insurance Cos. The firm also partners with banks that offer the coverage to borrowers as part of preparing the Phase 1 report detailing a site’s environmental condition.
However, some see insurance as a swift and thrifty alternative to Phase 1 assessments. The latter can take 30 days to complete, and on average cost $2,000, said Perry. Environmental insurance, on the other hand, can cost as little as $500 and be obtained in three days, he said.
The Mortgage Bankers Association of America plans to issue a report this year on environmental insurance.
Conventional insurance companies are not the only ones offering developers this kind of protection. A Boston-based risk management and environmental remediation firm, TerraSure, sells developers a guarantee to cover the cost of repairing whatever contamination is initially discovered at a site, plus any additional problems uncovered during remediation. If there is a cost overrun, engineering consulting firm Gannett Fleming, TerraSure’s parent, will cover it, said Rayomand Bhumgara, a TerraSure managing director. TerraSure also shields its clients from regulatory red tape by dealing directly with the regulators all the way to closure.
Not
everyone is so sure that environmental insurance is poised to take
off, however. Many insurers ceased offering it in the 1980s because
of extensive claims, said LandBank President Bill Lynott, and today
there are only five that do. Besides Chubb, these are Zurich, ACE
Environmental, American International Group and XL Environmental.
“Some policies are written to be very constraining,” Lynott
said. “It is still morphing.”
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