By ANDREW ZINN
Originally published in the Los Angeles Business Journal

Insurance may be one of the more complex and overlooked areas in commercial real estate financing. Typically, banks require borrowers to obtain some level of insurance to cover the value of the improvements being financed. Property and liability insurance policies are lengthy and their review is even more monotonous than reading the reams of paper produced by a bank in the form of commercial loan documents. Just like your loan documents, one should pay particular attention to the defined terms and exclusions in an insurance policy. The definitions and exclusions are the key to unlocking the scope of your coverage. One of the key exclusions you’ll find with standard property insurance policies is for pollution.

Introduced in 1978, environmental insurance was first developed to fill the insurance coverage gaps created by pollution exclusions in liability and property insurance policies. Because the definition of pollution may be subjective, exclusions in property and liability insurance policies have broadened as insurers continually adapt their policies to limit potential payouts on claims. Virtually any legal business activity can be insured for pollution loss, but knowing what to insure for is the key to obtaining the right environmental insurance.

AS ONE OF THE NATION’S LARGEST FAMILY-OWNED AND LED BANKS, FIRST BANK HAS ENJOYED A LEGACY OF STRENGTH, WHILE BUILDING DEEP RELATIONSHIPS, FOR OVER 100 YEARS.

ANDREW ZINN,
SENIOR VICE PRESIDENT
S. CALIFORNIA
COMMERCIAL REAL ESTATE
ANDREW.ZINN@FBOL.COM

Most financial institutions require their borrowers to obtain a Phase I Environmental Site Assessment (ESA) covering the commercial property being financed. An ESA involves a review of records, a site inspection, and interviews with owners, occupants, neighbors and local government officials. Borrowers should make sure their ESA adheres to the standards established by the American Society for Testing and Materials (ASTM). This report provides the owner with evidence of an “All-Appropriate-Inquiry” to address the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). CERCLA contains national policy and procedures for containing or removing hazardous substances. Also, be aware of state and local regulations as these may be in addition to CERCLA standards. Armed with an ESA, a borrower can filter the vast options for environmental coverage to purchase a policy that’s right for their needs. Consider a policy that may be assigned upon sale. This could potentially improve the marketability of your property relative to comparable ones.

As one of the nation’s largest family- owned and led banks, First Bank has enjoyed a legacy of strength, while building deep relationships, for over 100 years. When we make a commercial loan to a client, we consider all aspects of the loan. Part of this due diligence is creating an alignment with our client so that we both benefit from risk management. Armed with this knowledge, be sure to ask your banker if they’ve read all of the exclusions in your insurance policy and provided you with recommendations that will help mitigate your exposure to third-party claims or losses!


Andrew Zinn possesses over 17 years of lending experience in commercial real estate with the ability to structure and close loans between $2M and $20M. Andrew holds a B.A. Degree in Economics from UC Berkeley and is an honors graduate from Pacific Coast Banking School.