Financial Institutions

What is a Pollutant? 

Any material, substance, liquid, product, etc… which is introduced into an environment for other than its intended use / purpose. Fresh water, cheese, and milk have all been classified as pollutants by Insurance Carriers under various circumstances. 

Insured’s should be aware that pollutants (such as mold) are excluded from coverage on most GL policies. And GL policies that do provide pollution coverage typically do so on a limited basis, with inadequate limits and/or strict discovery and reporting requirements for there to be coverage. In the event of a pollution loss at one of your properties, does your insurance provide adequate coverage?

Environmental Exposures Impacting Financial Institutions

May include, but are not limited to; Historical contamination from agriculture, mining, lagoons, landfills, manufacturing, scrap yards, gas stations;  PFAS / PFOA;  Illegal dumping or burial of hazardous materials;  Pollution from neighboring properties migrating onto Financial Institution owned or collateral property;  Storm water runoff;  Natural resource damages; Vapor Intrusion;  Easements that cross the property which may leak or spill hazardous materials;  Contamination such as fertilizers or pesticides from past farming / landscaping or similar uses;  Leaks from elevator hydraulic fluid storage tanks;  Impacting sensitive areas such as wetlands or endangered species;  Corroded wastewater and storm water sewers;  Excavation through and spreading of unknown preexisting contaminated soil;  Impacting groundwater from drilling and excavation work (i.e. cross contamination of aquifers, etc.);  Old and/or unknown leaking underground storage tanks;  Impacting underground utilities during construction;  Tenants using or storing environmentally sensitive materials, chemicals, waste….;  Spill of oils/fuels/chemicals brought onsite;  Vandalism;  Sick building syndrome; Mold; Asbestos;  Lead;  loading and unloading products/materials from tucks, rail road, barges, aircraft over unsealed ground;  Past/present use of septic systems;  Above ground or underground storage tanks;  Adverse reactions and interactions of chemical compounds that accidentally commingle during a fire;  Wastewaters generated from human septage;  Janitorial cleaning compounds;  No emergency and spill control plans;  nuisance odors;  Devaluation of real estate asset due to buyers uncertainty concerning possible contaminants;  Silica;  Brownfields, etc..

Environmental Claim Scenarios

1. A bank loaned funds to a commercial real estate developer to develop several hundred acres of land that had been sitting idle. Though there were never industrial activities on the property, a thorough due diligence was completed. The property was given a clean bill of health and an aggressive redevelopment plan, including both residential and retail sections, was begun. Three months later, an excavator uncovered rusty barrels that had been leaking chemicals. Within days, investigators confirmed high levels of arsenic and heavy metals in the soil and groundwater on neighboring properties. The local drinking water supply was promptly shut down and over 10,000 residents were instructed to drink only bottled water. On top of the costs to remove contaminated soil and locate a reliable water source, legal suits for bodily injury and property damage totaled over $25 million. The developer defaulted on the loan and filed for bankruptcy.
2. A Financial Institution was preparing a foreclosed site for re-sale.  While the facility was unoccupied thieves broke into the structure to steal wiring and copper piping.  In the process the thieves damaged a transformer releasing PCB containing oil to the floor.  The financial institution was responsible for the clean-up of the contaminated concrete and soils which exceeded $200,000.
3. A real estate developer placed a new building on the site of a former parking lot. During excavation, petroleum hydrocarbon contamination was discovered.  Cleanup costs exceeded $700,000. 
4. A Financial Institution had collateral property a real estate developer was going to build several office buildings on.  During the time from the property purchase until development began waste was illegally disposed of on the property.  Testing revealed the cost to clean up the illegally disposed of waste would be several hundred thousand dollars which caused for the real estate developer to default on the loan.  The bank did not foreclose on the property concerned with potential lender liability exposures.  The case was still in litigation at the time of this report.
5. A Financial Institution purchased the site of a former gas station on which they planned to place a branch office.  Environmental due diligence did not reveal any Recognized Environmental Conditions (REC).  Once the branch was built it was discovered that vapor intrusion from a neighboring property was causing sick building syndrome in the bank branch.  The Financial Institution spent in excess of $100,000 for testing, installing a vapor barrier and ongoing remedial services.  
6. An environmental consultant performed a phase I site assessment at a site that had been previously used for manufacturing.  The Phase I said there were no Recognized Environmental Conditions (REC).  A Financial Institution loaned money on the property but during development an unregistered underground storage tank that was leaking was discovered.  The cost to remediate the site was in excess of $300,000 and along with diminution in value forced the Financial Institution to re-work the terms of the loan agreement to prevent foreclosure.  The property developer sued the consultant but it was determined the consultant followed proper protocol in performing the Phase I assessment.
7. A Financial Institution hired an HVAC contractor to upgrade their buildings HVAC system.  In performing their work, the contractor failed to vent the system properly. This caused for mold to build up in the duct work.  Over time building occupants began complaining of headaches and nausea.  As a result, several bodily injury suits were filed against the financial institution / building owner, who in turn sued the HVAC contractor for in excess of $1,500,000. 
8. A Financial Institution was built near a dry cleaner.  After the building was constructed vapor intrusion was detected in the building.  Testing identified PCE a dry-cleaning chemical was in soil and groundwater causing the vapor intrusion.  The dry cleaner was forced out of business and the Financial Institution Paid in excess of $400,000 for environmental due diligence, remediation, defense, third party bodily injury and property damage claims.
9. New construction commenced on a previously undeveloped parcel of land.  During excavation and dewatering activities, contaminated groundwater was discovered.  The developer was required by State regulatory authorities to collect, test and treat groundwater pumped out during the excavation process.  Contaminated soils were also discovered at the site.  Construction delays and additional expenses totaling over $1,000,000 were incurred by the developer.  It was eventually determined that the contamination had migrated from a nearby manufacturing facility that had gone into bankruptcy several years prior to the development project.
10. A Financial Institution had a plating company as a client.  Contamination was discovered on the plating company’s property causing the plating company to go out of business.  This resulted in the plating company defaulting on their mortgage, line of credit and other lines of business with the Financial Institution. 
11. A lender who provided a loan for a hotel purchased a Commercial Lender Environmental Policy.  After foreclosure, it was discovered that the hydraulic elevators had been neglected and leaked PCBs.  Due to the nature of the release, cleanup was limited and elevated levels of PCBs were allowed in place following remediation.  As a result, a diminution in value claim was made by the lender based on the now contaminated site being worthless. 

Overlooked Benefits of Environmental Liability Insurance

Unlike many liability exposures impacting financial intuitions, environmental losses are a severity risk, rather than a frequency risk. Since every Financial Institution is impacted by environmental exposures, consideration needs to be given to the economies of scale afforded with environmental liability insurance as part of your risk transfer strategy, versus self-insuring. 

Overlooked Benefits of environmental liability insurance: 

1. Defense Costs:  Environmental liabilities are relatively new and very litigious.  Even if you do nothing wrong you can still get named in a suit and have to expense defense costs i.e. legal fees, environmental investigations 
2. Claim Management:  All policies come with specialists to assist you in handling a claim.  Who is in charge of communications, public relations, emergency response, government compliance, financial management, third party claims for bodily injury, property damage, natural resource damages….?
3. Third Party Liability:  The majority of the time the cost to clean up the environmental problem/s is far less than the associated claims that come in from third parties for bodily injury, property damage and business interruption.  You need to look at your client’s and neighbors that can be impacted if you or a sub-contractor/vendor create an environmental loss.

Environmental Liability Insurance Coverages

Environmental Impairment Liability (EIL) 

EIL is for Financial Institutions susceptible to economic loss caused by pollution that actually or allegedly originated from their properties.  Sometimes referred to as Pollution Legal Liability (PLL), this coverage is for those who own, operate, lease, or have any other insurable interest in real property and/or the operations. Coverage can be written in a variety of ways addressing unknown preexisting conditions or new conditions.  Coverage can include third party bodily injury and property damage along with business interruption and extra expense, on and off site cleanup costs, legal defense expenses, non-owned disposal sites, transportation and more. EIL can be offered on multiyear terms.  Most EIL policies cover above ground storage tanks up to a certain size.  You can cover multiple locations on a single policy.  Consideration should also be given to the value EIL offers on a financial institutions collateral property.

Lender Liability Coverage (LLC)

For years Financial Institutions have utilized environmental indemnifications in their loan documents for commercial real estate backed loans as an attempt to protect themselves from environmental liabilities.  In the mid 1990’s, environmental due diligence (Phase I, Phase II… environmental site assessments) was added as another layer of defense for a Financial Institutions lender liability exposure.  

In today’s transparent business environment, we know the problems created by this approach and the fact that environmental indemnifications and due diligence are a very cursory way of addressing environmental liabilities.  As so many Financial Institutions have learned, when it comes to environmental liabilities, a client’s environmental problem can become the Financial Institutions problem.

To address the potential environmental liabilities faced by Financial Institutions, there is a risk transfer product called Lender Liability Coverage (LLC).  LLC enables Financial Institutions to shield assets by protecting collateral and insuring environmental liability arising from collateral properties.  LLC fills gaps created by traditional environmental indemnifications, due diligence….

LLC provides collateral value protection in the event of a loan default and a newly discovered pollution event at the covered location.  When this occurs, LLC can pay the lesser of the outstanding loan balance and extra expenses or the estimated cleanup costs.  If the estimated cleanup costs are 50% or greater than the outstanding loan balance you may select payment of the outstanding loan balance, or payment of the outstanding loan balance and extra expense.  

Foreclosure is not required prior to making a claim and some insurance carriers offer a broad definition of default that includes both monetary and technical default. 

LLC can be used on a single transaction or on a portfolio basis.  Coverage is offered on multiyear policies that can run up to the term to maturity of the insured loan.  LLC offers the ability to assign interest to a successor lien holder. LLC allows a Financial Institution to be more competitive on loans they would once be forced to pass-up due to environmental uncertainties, plus;

• Increase loan portfolio value by protecting collateral and insuring environmental liability arising from collateral properties.  
• Offers first party cleanup costs for claims made after the lender has foreclosed on a covered location. 
• Covers third party bodily injury, property damage claims (includes clean up costs and natural resource damages), and defense costs, caused by a pollution event during the policy period at the covered location.  
• Claim reopeners for discovery of new and / or additional cleanup costs.
• Accelerates the loan process.  Note:  For financial institutions with in-house environmental departments, LLC provides valuable tools to assist in expediting and securing loans.  For financial institutions that outsource their environmental services, LLC can assist by expanding your environmental services and reduce costly outsourcing.
• Reduces costs by minimizing or eliminating traditional environmental due diligence processes.
• Allows Financial Institutions to better manage cash flow in the event of a claim. 
• Coverage is offered on a single transaction or master portfolio basis.  
• Multiyear policies, up to the term to maturity of the insured loan as outlined in the mortgage agreement.  
• Has the ability to enhance a pool’s credit rating.  Rating agencies have recognized that environmental insurance can add credit support to commercial mortgage pools.  
• Expert claims handling service.

Property Transfer Coverage

When buying or selling property there can be unknown preexisting environmental conditions. Since environmental due diligence (All Appropriate Inquiry (AAI), a Phase I or Phase II survey, Baseline Environmental Assessment (BEA)….), cannot guarantee uncovering all potential environmental liabilities, insurance companies have created property transfer insurance. This coverage protects the new owner or any party with an insurable interest, against unknown environmental conditions that may be discovered during the policy period, that were not caused by the new owner. 

This coverage not only helps to keep the property at its maximum value, it will assist the purchaser in being able to secure the necessary financing to complete their transaction.  You can cover multiple locations on a single policy.