Environmental Endorsements
What Coverages Do These Endorsements Offer?
By James Rogers, Esq.
How many times have you issued the ALTA 8.1 or ALTA 8.2 Environmental Protection Lien (EPL) endorsement and thought about what coverage the endorsement provides? Chances are you have issued some form of these endorsements with almost every loan policy you’ve prepared. But in doing so, did you give some sort of environmental protection to the lender? Have you somehow taken on liability under the Endangered Species Act or the Migratory Bird Act?
Well, luckily you haven’t. In fact, these endorsements do not provide coverage for environmental protection, or declarations that the property is free from contamination or hazardous material. Instead, you have provided affirmative coverage that there is no document in the public records that shows a notice of enforcement of an environmental lien or an actual environmental lien. Also, via the EPL endorsement, you have potentially provided coverage affirming there are no state statutes that could affect lien priority of the insured security instrument at some point in the future, post-policy.
Coverage Offered
Generally, per the language in the title insurance policy jacket, there is no coverage for losses caused by environmental risks or regulations, or any losses arising from them.
For example, the ALTA 2006 Loan Policy contains the following exclusion:
The following matters are expressly excluded from the coverage of this policy, and the Company will not pay loss or damage, costs, attorneys’ fees, or expenses that arise by reason of: “1. (a) Any law, ordinance, permit, or governmental regulation (including those relating to building and zoning) restricting, regulating, prohibiting, or relating to … (iv) environmental protection; or the effect of any violation of these laws, ordinances, or governmental regulations.”
Since environmental protection matters are excluded under the standard provisions of the policy, an endorsement would have to be used to provide the insured with protection regarding those issues. The ALTA 8.1 and 8.2 endorsements provide limited environmental protection coverage.
Using the 8.1 and 8.2 Endorsements
The ALTA 8.1 endorsement is only issued in conjunction with a loan policy covering primarily residential property. Section (a) of the endorsement ensures that there are no environmental protection liens filed in the public records which have priority over the lien of the insured mortgage unless excepted in Schedule B. Section (b) of the endorsement ensures that there are no state statutes which provide that any liens filed after the Date of Policy would have priority over the lien of the insured mortgage, except for those specifically excepted under Section (b).
The ALTA 8.2 endorsement provides insurance under Loan and Owner’s policies on commercial property. It insures against existing recorded federal or state environmental protection liens, akin to the ALTA 8.1 endorsement coverages.
Both endorsements also provide that, in addition to no EPL matter being found in the public records, there is nothing “filed in the records of the clerk of the United States district court for the district in which the Land is located.”
However, with the adoption of the Uniform Federal Lien Registration Act (UFLRA) by most states, it is no longer necessary to research the federal district court clerk’s office.
Per the UFLRA, all liens must be filed in the appropriate recording office where the real estate is located. In those states that have not adopted the UFLRA, various other state statutes create the necessity of filing the EPL with the appropriate county recording office in a manner akin to federal tax liens. As such, a search of the federal district court clerk’s office is also not necessary in these states.
When we look at the 2021 ALTA form amendments, changes have been made to the ALTA 8.1 EPL endorsement, but only to reflect the now defined term, “State,” under the new 2021 policy forms. The coverage afforded under the 2021 endorsement has not changed.
Under the new 2021 ALTA Loan Policy, the exclusion for “environmental protection” under the 2006 ALTA Loan Policy is carried forward and expanded to exclude coverage for “environmental remediation or protection.” The same change is also carried over to the 2021 ALTA Owner’s Policy.
What Coverages Do the EPL Endorsements Provide?
When we talk about the federal statutes relevant to EPL coverage, we are mainly talking about the Comprehensive Environmental Response, Compensation and Liability Act (known as CERCLA or the Superfund Act, as amended and supplemented by the Superfund Amendments and Reauthorization Act of 1986, or SARA).
So, why would it be important to give coverage that there is no EPL filed of record against a particular piece of property?
With the Superfund Law, there is potential for lender liability for the clean-up costs of contaminated sites, particularly in the event of a borrower default resulting in the lender taking title to the property through a foreclosure action. The costs of such clean-ups can be substantial, and Superfund liens have the potential to impact the priority of the insured mortgage. If the EPL is filed before the insured security instrument, it will have priority over that mortgage.
It is important to note that the ALTA 8.1 endorsement also provides coverage that there are no state statutes relating to the federal Superfund lien statutes that could affect lien priority of the insured security instrument. Most often, when we complete the EPL endorsements, we are notating “NONE” in the Section (b) of the endorsement. However, there are a multitude of states that have statutes that may need to be indicated on the endorsement, depending on the situation. Further guidance on specific state statutes that might warrant inclusion within Section (b) should be reviewed with your NATIC/Doma state underwriting counsel.
The Courts’ Interpretations
A review of published opinions discloses very little litigation surrounding the EPL endorsements. However, there are two cases worth noting.
The first case, South Shore Bank v. Stewart Title Guaranty Co., 688 F. Supp. 803 (1988), involved a lien that could have attached to the insured property via the Connecticut General Statutes. The endorsement to the title policy provided that, “The Company insures against loss or damage sustained by the insured by reason of a lien which attaches to the insured premises pursuant to section 22a-452a of the Connecticut General Statutes as a result of conditions existing on or at the insured premises as of the date of the policy if such lien claims priority over the lien of the insured mortgage.” The statute noted in the endorsement provides that Connecticut could “file a lien on property if [it] cleaned [the property] of hazardous waste with state funds to secure reimbursement thereof.”
During foreclosure of the insured’s lien, an environmental assessment conducted on the site found the presence of hazardous waste on the property. The insured tendered a claim to Stewart, which Stewart denied. Affirming summary judgment in Stewart’s favor, the court noted that no lien by Connecticut had been filed against the property as required by the endorsement. Additionally, the court noted that “as a matter of law, the possibility that [Connecticut] may file a lien does not trigger insurance coverage under the endorsement.”
“The reference to the statute in the endorsement is not to ensure an immediate response to environmental pollution but rather to protect the insured from a challenge to its title by reason of [Connecticut’s] lien that has priority over [the insured’s] legal rights in the property,” the court noted.
The second case, Lick Mill Creek Apartments v. Chi. Title Ins. Co., 231 Cal. App. 3d 1654 (1991), involved a situation where a developer purchased various lots and obtained title policies. Following the purchase of the lots, the insureds “incurred costs for removal and cleanup of the hazardous substances in order ‘to mitigate [their] damages and avoid costs of compliance with government mandate.’” The insureds subsequently tendered a claim to the underwriter seeking indemnification “for the sums expended in their cleanup efforts.” The underwriter subsequently denied coverage for the claim.
After an extensive discussion of title insurance, construction of language in insurance policies, marketability of title and encumbrances on title, the Court of Appeals affirmed the trial court’s ruling in favor of the underwriter. When looking at the exclusions for governmental regulation and police power in the policies, the court concluded that the policies only provided coverage for defects relating to title. The hazardous substances related to a physical condition of that land, and therefore, no coverage was afforded under the policy.
With this additional information, you should feel more comfortable issuing an ALTA 8.1 and 8.2 endorsement for your customers. You will also be able to respond in more detail to the standard question, “What does this cover?” NATIC/Doma agents can always email underwriting counsel for help at [email protected].
James Rogers is Vice President, Mountain Region Underwriting Counsel for Doma.