With lenders tightening their standards, commercial property buyersshould start their insurance planning well before closing or refinancingdiscussions. Lenders want to know that the property is protected, not only forthe sake of your investment but also to safeguard the money they are puttinginto the loan.
Besides demanding adequate coverage limits, insurers are strictlyenforcing A-ratedinsurer requirements and requiring updated appraisals to avoidunderinsurance.
These developments require greater coordination between the lender, yourinsurance broker and legal counsel.
Essential insurance for loans
When seeking a business loan, lenders may require borrowers to prove theyhave several types of insurance. Here’show lenders are scrutinizing three of the most commonly required policies:
Property — Lenders are concerned that property values may be understated inlight of rampant rebuilding cost inflation. If a major loss occurs, inadequatecoverage could create a funding gap that the policyholder would have to coverout of pocket. If that amount is large enough, it could hurt the borrower’sability to make loan payments.
As a result, lenders want to see property policy limits that can coverthe cost to rebuild rather than just the loan balance.
Business interruption —Lenders prioritize business interruption coverage because itdirectly impacts a borrower’s ability to make loan payments if disasterstrikes. If a business is unable to operate due to a fire or supply chaindisruption, it could severely affect its cash flow and imperil its ability tomake loan payments.
Business interruption may be included in the language of a commercialproperty policy, but it’s important to ensure it is also suitable for lendingpurposes.
General liability —Lenders also want their borrowers to have a general liabilitypolicy in place that has adequate policy limits. They may require that theborrower carries additional umbrella insurance to cover the cost of largeclaims.
Liability insurance rates have been rising rapidly due to an explosion inlarge settlements, often in the tens of millions of dollars. Lenders areinsisting that businesses taking out loans have policy limits that will ensurethey can stay viable after a large verdict.
Other considerations
As claims costs have risen, lenders are increasingly reviewingendorsements, limits and policy languagemore carefully to ensure compliance with loan agreements and confirm thatinsurance can cover most eventualities.
Lenders often request particular wording and endorsements that ensuretheir rights are protected. These may be found in certificates of insurance orwithin the policy, including:
Mortgagee clause and lender loss payable wording — This clause ensures the lender is paidif a covered loss occurs. It prioritizes the lender’s interest in the event ofa claim.
Proof of insurance showing correct limits and dates — The lender may request a certificateof insurance that lists policy limits, effective dates and contact informationfor the insurer. Any mistake can delay closing.
Replacement cost valuation —Lenders want the property insured at full replacement cost. This meansthe policy should reflect what it would take to rebuild the structure today,not what was originally paid for it.
Acceptable deductible levels — Some lenders limit how high the deductible can be. If the deductible istoo high, they may require changes before approving the loan.
Some issues can delay closings on properties or cause problems after theloan is made, such as:
· Missing additional insuredendorsements,
· Insufficient umbrella limits, or
· Inconsistent named insured listings.
Finally, if you are applying for a loan, reach out to us early as themarket has changed drastically, particularly in high-risk areas.