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IBA: Insurance Practices in Commercial Real Estate Loans

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By David Duncan, Bose McKinney & Evans

Requesting appropriate insurance coverages and obtaining certificates of insurance verifying such coverages are in place may be one of the least understood, and thereby, among the most overlooked issues in commercial real estate loan transactions.

In a loan involving commercial real estate, the lender should require the borrower to maintain standard all risk hazard insurance insuring the property against losses from fire, lighting, explosion, windstorm or hail, smoke, impact of vehicles and aircraft, and malicious mischief. If loan proceeds will fund construction activities, the lender should also require the borrower to maintain builder’s risk insurance which affords coverage for similar losses while the insured property is under construction. If the project includes leased real estate, the lender should require the borrower to maintain a loss of rental value endorsement to the property insurance. Otherwise, the lender should require the borrower to maintain a business interruption endorsement. Finally, the lender should also require the borrower to maintain commercial general liability insurance to insure against claims for bodily injury, death, or property damage.

The lender, and its successors and assigns, should be added as a mortgagee and loss payee on the borrower’s commercial property insurance policy. Likewise, the lender should be added as an additional insured on the borrower’s commercial general liability insurance policy. The lender should require that the policy of commercial property insurance contain a standard mortgagee clause which defines the lender as an insured mortgage holder, provides that the lender’s right to the proceeds of insurance will not be invalidated by any act or neglect of the property owner/mortgagor and requires the insurer to provide notice of cancellation to the lender. If the lender is named as a mortgagee under a standard mortgagee clause they are afforded independent contract rights with the insurer, whereas, being named only as a loss payee or additional insured affords no independent contract rights and subjects the lender to the same defenses the insurer would have against the property owner.

Assuming the insurance policies are not available for review prior to closing, obtaining the proper form of certificate of insurance should be given adequate consideration. The insurance industry subscribes to the form certificates of insurance published by ACORD. ACORD 24 and 28 are standard forms to evidence property insurance. ACORD 25 is the standard certificate of insurance for commercial general liability insurance.

ACORD 75 binds coverage for the policies referenced.

Each of ACORD 24, 25 and 28 typically contain language unfavorable to lenders and:

are issued as a matter of information only and confers no rights upon the certificate holder;

do not constitute a contract between the issuing insurer, producer and certificate holder;

are subject to all the terms, exclusions and conditions of the insurance policy;

policy limits may have been reduced by claims; and

notice of cancellation will be delivered in accordance with the policy provisions.

ACORD 75 is issued subject to the terms, conditions and limitations of the policies in current use by the underwriting company, but is an insurance binder for the limited period of time stated therein. Accordingly, ACORD 75 is the only form lenders should rely upon for evidence of binding coverage.

In the past, attorneys have accepted ACORD certificates of insurance marked-up by the issuing agent with handwritten edits. In April 2009, the Indiana Department of Insurance (IDOI) issued Bulletin 170 addressing this practice. In Bulletin 170, the IDOI stated that “certificates generally serve only as an informational summary of insurance in lieu of an actual copy of an insurance policy and should not be used to amend, extend, or alter policy terms . . . .” and made reference to the language contained in the ACORD forms as acceptable to meet the requirements of the IDOI “so long as the forms are not altered to inappropriately modify terms of the policy.”

It is the best practice to obtain a copy of the policy or a policy binder prior to closing on a commercial real estate loan transaction as certificates/evidences of insurance may not bind coverage. Likewise, inaccuracies in the certificates/evidences of insurance and/or reliance upon modifications by the issuing agent may not bind the underwriting insurance company, and may leave the lender with merely a claim against the issuing agent’s errors and omissions insurance. Depending on the limits of such errors and omissions coverage, this could expose the lender to unintended financial risks.•

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  1. I have been on this program while on parole from 2011-2013. No person should be forced mentally to share private details of their personal life with total strangers. Also giving permission for a mental therapist to report to your parole agent that your not participating in group therapy because you don't have the financial mean to be in the group therapy. I was personally singled out and sent back three times for not having money and also sent back within the six month when you aren't to be sent according to state law. I will work to het this INSOMM's removed from this state. I also had twelve or thirteen parole agents with a fifteen month period. Thanks for your time.

  2. Our nation produces very few jurists of the caliber of Justice DOUGLAS and his peers these days. Here is that great civil libertarian, who recognized government as both a blessing and, when corrupted by ideological interests, a curse: "Once the investigator has only the conscience of government as a guide, the conscience can become ‘ravenous,’ as Cromwell, bent on destroying Thomas More, said in Bolt, A Man For All Seasons (1960), p. 120. The First Amendment mirrors many episodes where men, harried and harassed by government, sought refuge in their conscience, as these lines of Thomas More show: ‘MORE: And when we stand before God, and you are sent to Paradise for doing according to your conscience, *575 and I am damned for not doing according to mine, will you come with me, for fellowship? ‘CRANMER: So those of us whose names are there are damned, Sir Thomas? ‘MORE: I don't know, Your Grace. I have no window to look into another man's conscience. I condemn no one. ‘CRANMER: Then the matter is capable of question? ‘MORE: Certainly. ‘CRANMER: But that you owe obedience to your King is not capable of question. So weigh a doubt against a certainty—and sign. ‘MORE: Some men think the Earth is round, others think it flat; it is a matter capable of question. But if it is flat, will the King's command make it round? And if it is round, will the King's command flatten it? No, I will not sign.’ Id., pp. 132—133. DOUGLAS THEN WROTE: Where government is the Big Brother,11 privacy gives way to surveillance. **909 But our commitment is otherwise. *576 By the First Amendment we have staked our security on freedom to promote a multiplicity of ideas, to associate at will with kindred spirits, and to defy governmental intrusion into these precincts" Gibson v. Florida Legislative Investigation Comm., 372 U.S. 539, 574-76, 83 S. Ct. 889, 908-09, 9 L. Ed. 2d 929 (1963) Mr. Justice DOUGLAS, concurring. I write: Happy Memorial Day to all -- God please bless our fallen who lived and died to preserve constitutional governance in our wonderful series of Republics. And God open the eyes of those government officials who denounce the constitutions of these Republics by arbitrary actions arising out capricious motives.

  3. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  4. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  5. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

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