This article will address two aspects of the new environmental insurance policies for lenders (usually referred to as secured creditor, or SC, policies): that of the sometimes significant differences among the policies now on the market, and the controversial due diligence issue—whether the policies can be a substitute for environmental due diligence or a Phase I. The four major environmental carriers offer five off‐the‐shelf forms to protect the lender from environmental liability. Each form has a coverage part or insuring agreement applicable to the lender's primary concern, liability arising out of the borrower's inability to repay a loan due to a pollution condition; this is generally called the collateral loss value coverage part. The other coverage parts or insuring agreements of the policies address the lender's direct liability for cleanup costs, bodily injury, or property damage, which is of lesser concern to the lender, particularly before foreclosure. The collateral loss value coverage parts of the five policies differ significantly from each other in their treatment of ‘trigger of coverage and method of payment. The direct liability coverage parts differ somewhat less from each other. The four carriers have very different approaches to what they will do when there is a desire for combined coverage, that is, coverage for the borrower as well as the bank. The premiums for such combined coverage and for separate SC policies can vary widely, although SC policy premiums, in general, are often significantly lower than pollution liability policy premiums for the owner or borrower with respect to the same property. Lenders can purchase two types of portfolio programs‐a blanket policy applicable to a portfolio of loans, and portfolio insurance that can be used for securitization purposes. It is these portfolio programs that have been marketed as a substitute for due diligence. Environmental insurance can never be a true substitute for due diligence. The two provide an entirely different form of protection and are natural complements of, not substitutes for, one another. However, it may be possible for banks to use SC portfolio coverage as an alternative to the banks’ due diligence programs with regard to the bank's liability for collateral loss value. The rating agencies have recently concluded that this can be done for conduitor small loans if certain of their concerns are addressed: continued reliance on due diligence in certain contexts; the company's Best's rating; its claims‐paying record; and, most crucially, the policy form. While all of the policies contain provisions that the rating agencies criticize, the carriers are generally flexible about tailoring policy language to the requirements of a particular deal, provided someone competent represents the lender in negotiating those changes.
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