In the early 1980's, several states began passing environmental protection statutes which included provisions allowing for a lien to be placed on property which was in some way related either to the hazardous waste site, or to a party involved with the waste These liens typically enjoyed a "super priority" status which enabled them to jump ahead of any pre-existing liens, including first mortgages. As you can imagine, mortgage lenders were gravely concerned that a post-closing involvement with a hazardous waste spill by the borrower, either on the particular locus, or off, would result in their mortgage effectively being wiped out.
In an effort to alleviate these fears, mortgage lenders turned to title insurance companies seeking some protection. Initially, title insurers began offering affirmative coverage with respect to the priority of mortgage liens over these super liens. Typically, this coverage was based on the tendering of an environmental site assessment report to the underwriter, which would then be reviewed and a determination made with respect to the site.
It rapidly became apparent to the underwriters, however, that they were in no position to make an intelligent determination with respect to this issue. Likewise, this kind of insurance far exceeded the risks inherent in title insurance and was actually a form of liability insurance.
Several states even went so far as to prohibit title insurance companies from offering hazardous waste affirmative insurance. Eventually, most of the large national underwriters unilaterally decided to refuse to give this hazardous waste coverage. Based upon pressures from the secondary mortgage market, most state statutes were amended to exclude residential property from "super priority." In Massachusetts, the statute in question can be found in Mass. Gen. L. c. 21E. There is no "super priority" unless the particular property involved is the actual clean-up site and the property is not used for substantially residential purposes. We do not offer any coverage or affirmative insurance against hazardous waste liens. It is a matter that is specifically excluded under the policy.
Please do not confuse hazardous waste affirmative insurance with the use of the ALTA Form 8.1 Endorsement (i.e., the Environmental Protection Lien Endorsement). This endorsement does not provide hazardous waste insurance. It is an endorsement that is attached to residential loan policies only and makes two basic statements.
The first statement is that there are no environmental liens of record as of the date of the policy. In the event that there is a lien of record and it is not disclosed on Schedule B of the policy, the title insurance company may be liable for the effects of that lien on the mortgage. Therefore, it is imperative that any hazardous waste liens or notices which are discovered in the Registry of Deeds be listed as exceptions on Schedule B of the policy.
The second provision contained in the Form 8.1 Endorsement is a statement that there are no state environmental statutes which contain super priority liens unless they are listed on the endorsement. In Massachusetts, that statement is correct since this endorsement is attached to residential loan policies only. Under the statute as amended, there is no super priority for hazardous waste liens with respect to residential property. In some states, however, this is not the case.
Hazardous waste and environmental protection issues are a very dangerous area in which to tread. If you are representing a commercial purchaser or lender, it is imperative that you understand the full implications of the statute and its requirements. Because the cost of investigating and cleaning up a hazardous waste site is quite great, environmental liens are typically very large. As such, they have a very real chance of wiping out all of the security of the existing mortgage lender. If you have any questions in this area, please do not hesitate to contact the local office or the local state regulatory agency.