Environmental insurance is growing more popular among commercial real estate bankers, as an alternative to costly environmental studies.

First Union Corp. has emerged as the leading proponent of the insurance and hopes to make it widely available to its real estate customers next month.

With environmental insurance, customers pay a premium to cover the lender for any loss that may arise from environmental hazards. The borrower does not pay anything until the loan is approved.

The traditional approach, by contrast, calls for customers to pay for often-elaborate environmental studies while applying for a loan. They must bear the cost even if the loan is rejected.

About half the top 50 banking companies have plans to introduce environmental insurance programs by summer, said Curt Raffi, vice president at Environmental Capital Insurance Brokerage Inc., East Walpole, Mass. "With First Union taking that step, there's been a tidal wave of other lenders moving in that direction," he said.

Wells Fargo & Co. is working on a pilot that it hopes to roll out in the next month or two, said William Tryon, director of construction and environmental services at the San Francisco company.

Last June, First Union began offering the insurance to real estate customers in Florida and has since expanded the program to Georgia, New York, New Jersey, Connecticut, and Pennsylvania, said Kathryn Justis, vice president in charge of environmental policy. By April, she said, First Union hopes to offer it in the other five states where it lends for its portfolio.

Environmental insurance has been around for years, but only in the last year has it been offered to lenders for bulk programs rather than sold to borrowers individually.

The blanket policies cost less and take much less time to obtain than traditional environmental reports, known as Phase I studies. Moreover, rejected borrowers do not have to pay for insurance.

But environmental insurance may not make Phase I studies obsolete. The rating agencies have yet to approve use of the insurance instead of Phase I studies for loans in commercial mortgage securitizations.

Wells' Mr. Tryon said the insurance limits the number of claims that can be paid, both per property and on the entire blanket policy. "On the higher-dollar and higher-risk loans, there should be other levels of due diligence to go with the insurance," he said.

The insurance option may appeal mostly to borrowers for refinancings, Mr. Tryon added. That's because customers looking to finance property acquisitions will not want to pay for a policy that insures the lender but not themselves, he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.