Lender Environmental Site Protection
Policies which protect the lender come under a variety of names. Some of the variants are Secured Creditor, Collateral Impairment, Loan Balance and “Lesser Of”.
The feature that these have in common is that coverage is triggered by monetary default under the loan, combined with the presence of environmental contamination in excess of current permissible limits.
The default and contamination are considered “dual triggers” in that both must have occurred in order to trigger payment under the policy.
If the policy is triggered, the Loan Balance type form will pay the lender the unamortized balance of the loan, and eliminates the need for the lender to foreclose on the property or clean it up. Lenders prefer this type of policy form because it keeps them out of the chain of title. Upon payment by the insurer, the lender transfers its rights under the mortgage to the insurer and is then out of the loop. However, this policy is increasingly difficult to obtain.
A more readily available lender protection policy is known as the “lesser-of” form. Similar to the Loan Balance form, it is triggered by the simultaneous occurrence of monetary default and contamination at the site. However, instead of paying the lender the unamortized balance of the loan, it will pay the lesser of the cost to clean up the contamination or the unamortized balance of the loan. This approach is less desirable from a lender’s standpoint since it may wind up in the chain of title, depending on the circumstances of the claim. However, this policy is less expensive than the Loan Balance form.
Common exclusions in all environmental policies are for mold and asbestos. These coverage exclusions can be bought back subject to acceptable review of requested underwriting information. Mold coverage is not normally sold as a stand-alone product but is included in with the definition of environmental impairment.
The policies are written for terms of up to 10 years. Premium is a one-time payment collected at inception and is non-refundable because the policy may not be cancelled by either party to the contract. The limit of the policy and basis of the premium is the loan amount to be insured and may be as much as $100,000,000, although as a practical matter, loans much in excess of $50,000,000 are rarely insured.