Fleet Financial Group has become the first banking company to require virtually all commercial real estate borrowers to obtain environmental liability insurance.

Fleet is requiring a minimum of $2 million in coverage on each new or renewed loan.

About $5 billion in loans will be affected by the policy, the Providence, R.I. company said on Tuesday.

Other Banks Negotiating

Industry observers predict an increasing number of banks will soon follow Fleet's example and adopt similar requirements.

Eric Group Inc., the Denver-based firm that Fleet has designated to underwrite its liability insurance, said it was negotiating with 35 of the country's 50 biggest banks to provide environmental coverage. The banks were not identified.

"It is the wave of the future.. You just can't overlook environmental liability these days," said Diane Casey, executive director of the Independent Bankers Association of America, which intends to announce an environmental insurance program for its members next month.

Cleanup Costs Rising

Fleet and other banks have become increasingly wary of environmental liability in the wake of several court decisions holding them responsible for the cleanup costs of contaminated property they financed or operated.

Bankers say the fear of liability has chilled lending to businesses associated with pollution, such as dry cleaners and gas stations.

In a decisions that appeared to broaden banks' liability, the U.S. appeals court in Atlanta ruled two years ago that Fleet's factoring unit was potentially liable for cleanup claims because it was in a position to influence management of a troubled borrower's property. The case is still being litigated.

Customer Support Noted

Under Fleet's new liability policy, commercial borrowers of more than $1 million in real estate loans will be required to obtain the minimum $2 million in liability insurance.

Virtually all federal and state environmental claims are for $2 million or lower, said Paul K. Freeman, Eric's chief executive officer.

Although the cost of obtaining the insurance would be borne by Fleet's customers, none had any objection when they were notified of the new policy last week, said Joanne McClatchy, vice president of real estate at Fleet Bank of Rhode Island.

Indeed, Ms. McClatchy said, more borrowers could be drawn to the bank because it will allow them to obtain policies at group rates, meaning premiums of about one-tenth of the cost they would pay individually.

For example, a Fleet customer with a three-year real estate loan for $1 million would pay a premium of about $10,000 for the minimum environmental liability coverage.

The same coverage obtained independently could cost as much as $100,000.

Ms. McClatchy said Fleet would finance a borrower's insurance costs.

Although Eric is the only insurer endorsed by Fleet so far, other companies will be considered, Ms. McClatchy said. American International Group Inc. and New York-based Reliance Group Inc. also provide environmental policies.

Under its arrangement with Fleet, Eric will provide insurance policies for credits in the process of foreclosure and on real estate already owned by Fleet.

It also will provide policies to protect the bank against cleanup suits filed against the bank on loan after they are paid, Mr. Freeman said.

The $1.2 billion portfolio of Fleet's Rhode Island bank will be subject immediately to the insurance requirement.

The requirement will be phased in for other units of the $45 billion-asset holding company by yearend.

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