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
2015 Distinguished Barrister &
Up and Coming Lawyer Reception

Tuesday, May 5, 2015 • 4:30 - 7:00 pm
Learn More


ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. A traditional parade of attorneys? Really Evansville? Y'all need to get out more. When is the traditional parade of notaries? Nurses? Sanitation workers? Pole dancers? I gotta wonder, do throngs of admiring citizens gather to laud these marching servants of the constitution? "Show us your billing records!!!" Hoping some video gets posted. Ours is not a narcissistic profession by any chance, is it? Nah .....

  2. My previous comment not an aside at court. I agree with smith. Good call. Just thought posting here a bit on the if it bleeds it leads side. Most attorneys need to think of last lines of story above.

  3. Hello everyone I'm Gina and I'm here for the exact same thing you are. I have the wonderful joy of waking up every morning to my heart being pulled out and sheer terror of what DCS is going to Throw at me and my family today.Let me start from the !bebeginning.My daughter lost all rights to her 3beautiful children due to Severe mental issues she no longer lives in our state and has cut all ties.DCS led her to belive that once she done signed over her right the babies would be with their family. We have faught screamed begged and anything else we could possibly due I hired a lawyer five grand down the drain.You know all I want is my babies home.I've done everything they have even asked me to do.Now their saying I can't see my grandchildren cause I'M on a prescription for paipain.I have a very rare blood disease it causes cellulitis a form of blood poisoning to stay dormant in my tissues and nervous system it also causes a ,blood clotting disorder.even with the two blood thinners I'm on I still Continue to develop them them also.DCS knows about my illness and still they refuse to let me see my grandchildren. I Love and miss them so much Please can anyone help Us my grandchildren and I they should be worrying about what toy there going to play with but instead there worrying about if there ever coming home again.THANK YOU DCS FOR ALL YOU'VE DONE. ( And if anyone at all has any ideals or knows who can help. Please contact (765)960~5096.only serious callers

  4. He must be a Rethuglican, for if from the other side of the aisle such acts would be merely personal and thus not something that attaches to his professional life. AND ... gotta love this ... oh, and on top of talking dirty on the phone, he also, as an aside, guess we should mention, might be important, not sure, but .... "In addition to these allegations, Keaton was accused of failing to file an appeal after he collected advance payment from a client seeking to challenge a ruling that the client repay benefits because of unreported income." rimshot

  5. I am not a fan of some of the 8.4 discipline we have seen for private conduct-- but this was so egregious and abusive and had so many points of bad conduct relates to the law and the lawyer's status as a lawyer that it is clearly a proper and just disbarment. A truly despicable account of bad acts showing unfit character to practice law. I applaud the outcome.

ADVERTISEMENT