MBA to study environmental insurance with task force

Real Estate Weekly, July 31, 2002

When the Mortgage Bankers Association recently announced the formation of a task force on the use of environmental insurance for commercial real estate loans, it addressed a rapidly rising issue. As more and more major lenders adopt this relatively new kind of insurance to use in tandem with, or in place of, Phase I site assessment reports on loan applications, the MBA's Commercial Loan Origination Committee created the task force to provide context and standards for its members.

The task force - composed of lenders, attorneys, insurance authorities, and officials from the ratings agencies - is charged with educating MBA members on the types of environmental insurance policies prevalent in the commercial real estate finance industry today.

The task force will also define standards for environmental insurers by making structural and coverage recommendations.

"The MBA recognizes that environmental insurance has picked up serious momentum," said task force co-chair Charles Perry, president of Environmental Warranty, Inc., one of the nation's largest environmental insurance brokerage firms. "All commercial members stand to benefit from learning about the advantages of this insurance: speeding up the loan application process, transferring risk away from the lender, covering future environmental events over the life of the loan, and creating possible favorable treatment on the commercial mortgage-backed securities market."

Environmental insurance protects lending institutions from financial loss and liability when a loan defaults and real estate collateral is contaminated. Lenders that now use environmental insurance in tandem with, or in place of, Phase I due diligence include commercial banks, thrifts, and life insurance companies.

The task force's goals are to provide information and assistance to MBA members and prospective membership including:

* The types of commercial environmental policies and coverage available in the marketplace

* The applicability of use and benefits provided to lenders and borrowers under these various policies

* The processes necessary to engage in the use of these policies

* The pitfalls, if any, for lenders relating to each policy type (e.g. claims processes, exclusions)

"The MBA's acknowledgement of the industry's acceptance of this new tool is another step toward standardizing environmental risk management in commercial real estate lending," said Perry. "We're investigating the applicability of standards as an evolutionary process similar to that of the title insurance industry and the formation of ALTA (the American Land Title Association)."