Hartford Steam Boiler Offers Cleanup Liability Package

One of the nation's oldest property and casualty insurers is beginning to offer financial institutions and their customers some protection against costly cleanups of contaminated properties.

Hartford Steam Boiler Insurance and Inspection Co. in Connecticut has created a policy that combines an environmental assessment of a site with insurance to cover the cost of cleaning up any overlooked hazards. The product, called InSite, carries a one-time premium based on the property's value.

|Concern over Unknown Risk Is a Key Factor'

"When a lender is concerned about financing a piece of property for a developer or is facing a foreclosure, the concern over unknown risk is a key factor," said Charles L. Perry Jr., manager of the company's financial industry group. "When site assessments are done, there is no real guarantee that the property is clean.

"In addition, there are no standards in the assessment industry," he said, so reports and company quality vary greatly. Even engineers' evaluations may miss underground hazards or the effects of so-called "midnight dumpers," who pollute properties they do not own with hazardous waste.

InSite will be sold initially in Connecticut and Georgia. Connecticut was chosen because it is the insurer's home state. The Atlanta market is desirable because commercial real estate changes hands frequently there.

The premiums, paid at closing, are 0.5% of the property's value. For a $5 million property, the owner would pay a one-time premium of $25,000 for coverage that includes a $50,000 deductible.

In addition to insuring the land, buildings, or both, as indicated on the policy, the fee includes the cost of the assessment, which normally runs $7,000 to $10,000.

Because Hartford Steam Boiler operates its own engineering assessment division, it can offer to insure its own assessments.

Big Obstacle to Small Businesses

Environmental-audit worries have plagued many small businesses, particularly auto repair shops, gas stations, dry cleaners, and others that use hazardous materials.

Also, lenders have rejected many rehabilitation projects in the Northeast because of concerns about lender liability for unknown property contamination, Mr. Perry said.

"Environmental concerns slow loans to small businesses, because the lenders don't think the businesses are substantial enough to survive the cleanup costs," he said. "Connecticut developers are crying for credit to be released. We hope this is a way to free up credit and get things rolling again."

"This is a product with a place in the market" for banks and money managers, said Larry W. Telford, a San Francisco-based lawyer who specializes in environmental issues. "It's very important for business owners and lenders considering rehabilitation projects and the loft-style live-work construction projects that are increasing in popularity among smaller businesses."

Mr. Telford represents a number of engineering firms that insert disclaimers in their audits as protection against liability.

"The engineers' malpractice carriers are adamant -- they will not pick up any coverage for cleanups," he said. "When I represented lenders and developers, we needed an independent source for cleanup funds."

Praise from State Official

Ralph Shulansky, Connecticut's state banking commissioner, said, "A lender is always taking risks. This kind of coverage will be very helpful to the banks."

In his first few months on the job, Mr. Shulansky said, he reviewed several cases in which lenders may face considerable liability for hazardous waste cleanups. One involved a proposed renovation of an old mill for a small manufacturer's use. The engineers failed to notice underground chemical barrels that had begun to leak.

"The exposure is great -- especially to small businesses who aren't likely to be able to withstand the risk," he said. "This product is an interesting one, and I think it will find acceptance in the market."

Ms. Lauryn Franzoni, a freelance banking reporter, is based in Springfield, Mo.

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