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Lenders Environmental Liability

Providing lenders options and financial security in the event of a loan default.

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Confidence

In the event of a loan default, the lender’s interests are insured.

Specificity

Coverage focused on repayment of an outstanding loan balance to help avoid foreclosure, liquidation, or remediation.

Options

Covers bodily injury, property damage, and cleanup costs resulting from pollution conditions for single-sites or portfolios.

Financial institutions lend monies for a wide variety of reasons, with the expectation that the borrower will repay the loan. However, when a borrower defaults — and the collateral property turns out to be contaminated — the lender not only loses the unpaid loan amount, but the property value will be reduced, placing the lender at financial risk.  Lenders environmental liability (secured creditor) provides insurance for the lender’s interests.

Unknown environmental conditions are a significant source of loss for financial institutions where real estate is used as loan collateral. In the event of a loan default, as a lender you may have a few options. You can choose to foreclose and liquidate the contaminated property; however, because of the reduced property value, you stand to recover less than the outstanding loan balance. Alternatively, you can foreclose on the property and choose to remediate the contamination. But because of the combination of the cleanup costs and the potential of reduced market value due to the previous contamination, you may not recover the outstanding loan balance. You may also face the possibility of claims from third parties for bodily injury and property damage stemming from the contamination.

Having the borrower purchase a traditional site environmental liability policy that names the lender as an additional insured can provide you protection. But a lender policy specifically focuses on the needs of a lender, with coverage focused on repayment of an outstanding loan balance.

There are two approaches as to how a lender liability policy may indemnify the lender:

  1. Payment of the lesser of the outstanding loan balance, or the estimated cost to remediate the contamination.
  2. Payment of the outstanding loan balance.

In both cases, coverage is dual triggered policy; the borrower must default, and there is the existence of a pollution condition covered by the policy.

In addition to protection of the collateralized loan, a lender liability policy:

  • Covers bodily injury and property damage losses and cleanup costs resulting from pollution conditions.
  • Can be written on a single-site or on a portfolio basis.
  • Provides a competitive edge for lenders regarding standard environmental due-diligence techniques (a phase I assessment).
  • Can replace or augment a lender's own due-diligence process.

Why Marsh 

Marsh’s Environmental Practice is highly versed in identifying your business’ environmental exposures. Our insight enables us to be on the forefront of emerging issues and changing markets, allowing us to be a consistent market leader providing industry-leading insurance and non-insurance solutions to meet your needs.

Our people

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Liza Webster

Senior Vice President, Environmental Practice

  • United States