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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. If real money was spent on this study, what a shame. And if some air-head professor tries to use this to advance a career, pity the poor student. I am approaching a time that i (and others around me) should be vigilant. I don't think I'm anywhere near there yet, but seeing the subject I was looking forward to something I might use to look for some benchmarks. When finally finding my way to the hidden questionnaire all I could say to myself was...what a joke. Those are open and obvious signs of any impaired lawyer (or non-lawyer, for that matter), And if one needs a checklist to discern those tell-tale signs of impairment at any age, one shouldn't be practicing law. Another reason I don't regret dropping my ABA membership some number of years ago.

  2. The case should have been spiked. Give the kid a break. He can serve and maybe die for Uncle Sam and can't have a drink? Wow. And they won't even let him defend himself. What a gross lack of prosecutorial oversight and judgment. WOW

  3. I work with some older lawyers in the 70s, 80s, and they are sharp as tacks compared to the foggy minded, undisciplined, inexperienced, listless & aimless "youths" being churned out by the diploma mill law schools by the tens of thousands. A client is generally lucky to land a lawyer who has decided to stay in practice a long time. Young people shouldn't kid themselves. Experience is golden especially in something like law. When you start out as a new lawyer you are about as powerful as a babe in the cradle. Whereas the silver halo of age usually crowns someone who can strike like thunder.

  4. YES I WENT THROUGH THIS BEFORE IN A DIFFERENT SITUATION WITH MY YOUNGEST SON PEOPLE NEED TO LEAVE US ALONE WITH DCS IF WE ARE NOT HURTING OR NEGLECT OUR CHILDREN WHY ARE THEY EVEN CALLED OUT AND THE PEOPLE MAKING FALSE REPORTS NEED TO GO TO JAIL AND HAVE A CLASS D FELONY ON THERE RECORD TO SEE HOW IT FEELS. I WENT THREW ALOT WHEN HE WAS TAKEN WHAT ELSE DOES THESE SCHOOL WANT ME TO SERVE 25 YEARS TO LIFE ON LIES THERE TELLING OR EVEN LE SAME THING LIED TO THE COUNTY PROSECUTOR JUST SO I WOULD GET ARRESTED AND GET TIME HE THOUGHT AND IT TURNED OUT I DID WHAT I HAD TO DO NOT PROUD OF WHAT HAPPEN AND SHOULD KNOW ABOUT SEEKING MEDICAL ATTENTION FOR MY CHILD I AM DISABLED AND SICK OF GETTING TREATED BADLY HOW WOULD THEY LIKE IT IF I CALLED APS ON THEM FOR A CHANGE THEN THEY CAN COME AND ARREST THEM RIGHT OUT OF THE SCHOOL. NOW WE ARE HOMELESS AND THE CHILDREN ARE STAYING WITH A RELATIVE AND GUARDIAN AND THE SCHOOL WON'T LET THEM GO TO SCHOOL THERE BUT WANT THEM TO GO TO SCHOOL WHERE BULLYING IS ALLOWED REAL SMART THINKING ON A SCHOOL STAFF.

  5. Family court judges never fail to surprise me with their irrational thinking. First of all any man who abuses his wife is not fit to be a parent. A man who can't control his anger should not be allowed around his child unsupervised period. Just because he's never been convicted of abusing his child doesn't mean he won't and maybe he hasn't but a man that has such poor judgement and control is not fit to parent without oversight - only a moron would think otherwise. Secondly, why should the mother have to pay? He's the one who made the poor decisions to abuse and he should be the one to pay the price - monetarily and otherwise. Yes it's sad that the little girl may be deprived of her father, but really what kind of father is he - the one that abuses her mother the one that can't even step up and do what's necessary on his own instead the abused mother is to pay for him???? What is this Judge thinking? Another example of how this world rewards bad behavior and punishes those who do right. Way to go Judge - NOT.

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