Borrowers contemplating the purchase of insurance to cover the costs of pollution cleanup should examine the policies carefully to make sure the coverage is worth the premiums, warned Margaret V. Hathaway, partner in the Washington office of the law firm of Thacher Proffitt & Wood.

Hathaway, a leading figure in the effort to limit lender liability in pollution cleanup cases, said purchasers of such policies should particularly examine how much of the cleanup cost may be deductible from the coverage and whether the coverage applies only to pollution that occurred when the policy was in effect. Most problems arise from cases where the pollution occurs before a developer has purchased a site and is not discovered until development has begun or even has been completed, she explained.

The Fleet Financial Group, the loser in a major environmental lender liability suit, recently became the first lender to require borrowers to take out insurance to protect themselves from suits by federal and state governments seeking to recoup the costs of pollution cleanup.

The requirement to obtain a minimum of $2 million in coverage on each new development loan is designed to cover smaller cleanup cases, not those that are the result of federal Superfund cases, according to Joanne McClatchy. She is vice president for real estate at Fleet Bank of Rhode Island in Providence, one of eight banks in the Fleet Financial Group. The insurance is not required for commercial and industrial loans, she said.

Fleet said insurance obtained through the ERIC Group, an Englewood, Colo., environmental engineering and insurance firm, meets the standards set by the lender. Policies by other insurance companies will be considered, McClatchy said.

The ERIC Group policy covers all pollution that was not deliberately caused by the policyholder, including pollution that occurred before the policyholder became involved with the site and pollution that was caused by someone else. It covers all expenses up to the policy limit related to remediation of the pollution.

Policy premiums are $10,000 to $15,000 for three years of coverage, after which the policies can be renewed annually. McClatchy said she was not concerned that the insurance requirement will cost Fleet Financial any business. She said no customers had objected when they were told of the requirement.

She said the requirement won't be dropped even if federal legislation is passed exempting lenders from liability for pollution they haven't caused. Such a provision was attached last week by Sen. Jake Garn, R-Utah, to the Federal Housing Enterprises Regulatory Reform Act (S. 2733). That bill would set up a new regulatory structure for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

"We support that legislation, but it won't be enough," said McClatchy. "The states are passing their own pollution cleanup laws, and they are rather strict."

The Garn legislative effort and a recent regulation by the Environmental Protection Agency to limit lender liability was spurred to some extent by the loss of an environmental liability suit by another Fleet Financial Subsidiary, Fleet Factors Corp. The 11th U.S. Circuit Court of Appeals in 1990 ruled that a lender could be liable if it "participates in management to a degree indicating capacity to influence the corporation's treatment of hazardous wastes." That decision galvanized industry efforts to limit lender liability.

Paul Freeman, president and chief executive officer of the ERIC Group, said the insurance protects both the borrower and lender. Even with protection from lender liability, a financial institution could lose out if the cleanup costs for a polluted site made it impossible for the borrower to pay off a loan, he explained. He said he hopes to have agreements similar to the one with Fleet with as many as 50 banks by the end of the year.

The consequences of lender liability can be substantial. According to the EPA, the average Superfund site cost more than $25 million to clean up in 1989. The cases contemplated by Fleet are much smaller.

The Eric Group said its examination of 9,000 commercial real estate properties across the country revealed about 8% that required pollution cleanup under state or federal laws. Most of those cost lss than $2 million.

Fleet Bank of Rhode Island said it had foreclosed on six polluted properties whose cleanup costs are not expected to exceed $50,000 each.

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