Bankers reluctant to lend because of fears of hidden environmental costs are considering an array of insurance policies designed to limit the risk.

Experts said the insurance options stem from a recognition among insurers and bankers that huge claims against lenders under federal environmental clean-up laws, while theoretically possible, are extremely rare.

Previously, underwriters focused on irrational fears rather than the actual financial risks, which are more manageable, said Mark H. Snow, president of General Environmental Management Corp., which administers a fledgling environmental insurance program for American International Group.

At present, experts say, banks have three major options: coverage of actual cleanup costs, of bad loans that may involve cleanup, or of a combination of both for smaller loans.

Fleet Takes the Lead

Insurance policies on about two dozen real estate projects financed by Fleet Financial Group Inc.'s flagship bank in Rhode Island are "in the quotation stage," a bank official said. And last week, some 200 loan officers at the holding company's Connecticut and Massachusetts units started a two-week training program preparing to bring the program to their borrowers.

Ultimately, Fleet has said, all of its commercial real estate loans of more than $1 million will require coverage for at least $2 million of cleanup claims. The policy will affect about 100 developers, and other lenders are watching closely to see if Fleet keeps their business.

Chase Manhattan Corp. is said to be close to following suit, though a spokeswoman said the bank is merely considering requiring its borrowers to obtain insurance.

Eric Group's Coverage

Thus far, a plan developed by the Eric Group, Englewood, Colo., is the only one that Fleet's borrowers can use. But AIG is adapting one of its policies to Fleet's demands.

The Eric insurance carries a premium of $10,000 for the first million of coverage plus the $3,000 to $4,000 it costs to have an Eric-approved consultant conduct a Phase I environmental review. The policy, with a $10,000 deductible, pays off on problems not detected in the review.

The Eric plan includes coverage for legal costs, which often equal or exceed the cost of cleanup itself, said Glen E. Sibley, the national marketing director. It also offers coverage for contamination that may migrate to adjacent properties.

Mr. Snow said AIG'S coverage pays for cleanup of pollution when it is discovered, not just when a claim is made. Thus, a borrower can nip a problem in the bud, and is better able to continue paying the loan, he said.

AIG'S premiums vary according to property type. Up to $2 million of coverage with a $50,000 deductible for an apartment site can be acquired for as little as $2,000 a year, he said. On the other end of the scale, the premium for $10 million of coverage on an industrial park is $55,000.

The second type of coverage, also offered by AIG, "protects the bank right now for every loan on the books," said Thomas Vietor, senior vice president Johnson & Higgins' New York financial group, who developed the product.

The policy does not pay for cleanup but pays off the loan if it goes into default and an environmental cleanup is needed. Premiums could range from $200,000 to $600,000 a year for a typical bank portfolio, Mr. Vietor said.

Smaller-loan Coverage

The Independent Bankers Association of America has endorsed a third policy geared to smaller loans.

Empire Fire and Marine Insurance Co. is underwriting this policy, which pays for cleanup costs up to slightly over half the loan amount, said Charles R. Wise of H. Thomas Grimes Co., Ellicott City, Md., the broker of the policy.

If cleanup is expected to cost more than that, the coverage simply pays off the balance of the loan, like the AIG policy. The deductible is $10,000 or 5% of the loan balance, whichever is greater.

The coverage is cheaper because the underwriting relies on a transaction screen that can be completed by bank personnel, rather than the Phase I audit. There is a $250 fee for underwriting and a premium of about 25 basis points per loan per year, or about $250 per $100,000 of coverage.

Mr. Wise noted that the coverage includes intentional acts by borrowers, such as dumping waste on a property to discourage foreclosure.

Despite the obvious risks that arise from environmental cleanup laws, some of the new policies face market resistance.

Some bankers said they feel confident their in-house experts can weed out problem loans.

"The policy that pays off your loan helps the bank, but it doesn't help the community," one banker added.

Generally, the experts said, lenders should be on the lookout for language in the policies that won't cover pollution which took place in the past or that covers the lender only during the policy term.

Some policies also exclude, in fine print, the very kinds of spills the lender is hoping to guard against.

"I think these policies can be useful, but there are caveats," said Margaret V. Hathaway, an environmental specialist with the law firm of Thacher Proffitt & Wood. "The lenders have to look at them very carefully.

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