Cleanup Insurance Draws Interest
Some of the nation's biggest banks may soon require environmental liability insurance on loans they make.
One money-center bank is already close to such an agreement with ERIC Group Inc., an environmental engineering company in Englewood, Colo., that has branched out to provide environmental insurance.
Others are at earlier stages of exploring alternatives. "We are considering their product along with others," said a spokesman for Chase Manahattan Corp., one of several banking companies to confirm their interest in this type of insurance.
The American Bankers Association, which has made lender liability a high priority, has not endorsed ERIC's or any similar product. It is awaiting the outcome of the debate in Congress before taking a stance on insuring against liability, said Geoffrey D. Southwell, manager of the trade group's insurance unit.
Coverage for All New Loans
ERIC Group is now ready to supply banks with a product called Property Transfer Liability Insurance. A policy would accompany every new loan.
A handful of other firms, including the Hartford Steam and Boiler Co., and Atlanta-based National Assurance Corp., also offer coverage for cleanup costs. The standard insurance offered by major insurance companies excludes environmental cleanup.
Coverage could enable some banks to resume lending, though some cost would be added. ERIC officials said the coverage could cost up to 1% of the transaction amount, and much less than that in most cases.
Senate testimony indicates that 63% of bankers in a recent survey have rejected loans on the basis of liability concerns.
The Garn Initiative
An initiative introduced by Sen. Jake Garn, R-Utah, was to attach the latest version of his lender liability reform to the Senate version of a banking reform package that was announced last week.
And the Environmental Protection Agency, under pressure from the Arizona Department of Banking to restore lending at a contaminated residential area near Tucson Airport, issued a statement that its policy is not to pursue claims against the owners of residential property or their banks.
But even if such federal concerns are resolved, state and local cleanup laws will still pose problems for banks, ERIC chief executive Paul K. Freeman said.
ERIC's policy differs from traditional insurance products in that the price is established through an engineering study rather than an actuarial analysis.
Engineers approved by ERIC work would perform an audit of the property to be transferred. The coverage would extend to any contamination the audit fails to detect.
Mr. Freeman said the failure rate of audits is anywhere from 3% to 35%, depending on the type of contamination. "We've examined 9,000 audits and 3,000 cleanups," he said. "About one in eight properties has contamination." The coverage would usually cost $10,000 or less per $1 million transaction, he said.