Insurance: Historically, monarchs have had “an heir and a spare.” Tennis players are happy to get an “insurance break,” that second service break in a set. SBA lenders make sure there’s enough insurance to protect their guaranty. Denial is the last thing you want.
Important layers of protection. Proper documentation to support proof of insurance and the appropriate endorsements are an important layer of protection of your SBA guaranty. Make sure all insurance requirements are in your Authorization and are properly documented.
From time-to-time we get questions from lenders asking why an SBA reviewer says that they didn’t include “all appropriate insurance” and ask, “What does that mean?” It’s common for some lenders to require only real estate hazard and personal property insurance. Granted, it’s up to the lender to determine what insurance requirements go into the SBA Authorization. Yet sometimes you need “an heir and a spare.” It’s important to remember the other types of insurance you should consider based on the nature of the business. As SBA requires lenders to include “all appropriate insurance requirements.” Here are some types of insurance SBA should require if appropriate:
- Liability Insurance
- Product Liability Insurance
- Dram Shop/Host Liquor Liability Insurance
- Hazard Insurance
- Marine Insurance
- Malpractice Insurance
- Garage Insurance
- Disability Insurance
- Workers’ Compensation Insurance
- And any state-specific insurance requirements
To be complete, the Application must reflect an adequate coverage amount; a description of the coverage e.g., business personal property, building coverage; list the correct collateral location address(es); reflect that the lender is the lienholder with the proper endorsement; contain at least a 10-day notice for cancellation in the policy or endorsement. And don’t forget this important requirement!
“Insurance coverage must contain a LENDER’S LOSS PAYABLE CLAUSE (or substantial equivalent) in favor of the 7(a) Lender. … This clause protects the lender from any failure to act by the debtor or owner of the insured property.” SOP 50 10 6 Part 2, Chapter 6, c. iii, pg. 208.
Bottom Line: Protect your guaranty and your bottom line. Make sure you’ve included “all appropriate insurance,” that all insurance requirements are met ─ and document, document, document.