ILNews

IBA: Insurance Practices in Commercial Real Estate Loans

Back to TopCommentsE-mailPrintBookmark and Share

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.•

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. IF the Right to Vote is indeed a Right, then it is a RIGHT. That is the same for ALL eligible and properly registered voters. And this is, being able to cast one's vote - until the minute before the polls close in one's assigned precinct. NOT days before by absentee ballot, and NOT 9 miles from one's house (where it might be a burden to get to in time). I personally wait until the last minute to get in line. Because you never know what happens. THAT is my right, and that is Mr. Valenti's. If it is truly so horrible to let him on school grounds (exactly how many children are harmed by those required to register, on school grounds, on election day - seriously!), then move the polling place to a different location. For ALL voters in that precinct. Problem solved.

  2. "associates are becoming more mercenary. The path to partnership has become longer and more difficult so they are chasing short-term gains like high compensation." GOOD FOR THEM! HELL THERE OUGHT TO BE A UNION!

  3. Let's be honest. A glut of lawyers out there, because law schools have overproduced them. Law schools dont care, and big law loves it. So the firms can afford to underpay them. Typical capitalist situation. Wages have grown slowly for entry level lawyers the past 25 years it seems. Just like the rest of our economy. Might as well become a welder. Oh and the big money is mostly reserved for those who can log huge hours and will cut corners to get things handled. More capitalist joy. So the answer coming from the experts is to "capitalize" more competition from nonlawyers, and robots. ie "expert systems." One even hears talk of "offshoring" some legal work. thus undercutting the workers even more. And they wonder why people have been pulling for Bernie and Trump. Hello fools, it's not just the "working class" it's the overly educated suffering too.

  4. And with a whimpering hissy fit the charade came to an end ... http://baltimore.cbslocal.com/2016/07/27/all-charges-dropped-against-all-remaining-officers-in-freddie-gray-case/ WHISTLEBLOWERS are needed more than ever in a time such as this ... when politics trump justice and emotions trump reason. Blue Lives Matter.

  5. "pedigree"? I never knew that in order to become a successful or, for that matter, a talented attorney, one needs to have come from good stock. What should raise eyebrows even more than the starting associates' pay at this firm (and ones like it) is the belief systems they subscribe to re who is and isn't "fit" to practice law with them. Incredible the arrogance that exists throughout the practice of law in this country, especially at firms like this one.

ADVERTISEMENT