We get asked all the time: For the insurance coverage on vehicles we’re taking as collateral, should we be listed as an additional insured? If your knee-jerk response was, “Yes,” and you moved on, you probably put your loan at risk.

First of all, the borrower’s business personal property insurance (BPP) covers equipment (computers, tools, specialized equipment), furniture, inventory, fixtures, and even upgrades made to a leased space. Missing from this list is any mention of vehicles. That’s because vehicles are not covered by BPP policies. The borrower must have a separate business auto insurance policy.

“Additional Insured” Doesn’t Cut It. Adding the lender as an additional insured does not provide sufficient protection to the lender. It only provides the lender with the same coverage that extends to other insured parties. To whatever extent the policyholder is insured, so is an additional insured. And the same exclusions from coverage may apply.

This applies also to BPP taken as collateral. The business must have a business personal property insurance policy. This is not the same as business auto insurance. However in both cases, adding the lender as additional insured does not protect the lender, and so does not fulfill SBA’s requirements.

JRB Recommends …  that the lender be named a “Lender Loss Payee” in both business personal property insurance policies and business auto insurance policies. A Lender Loss  Payee, properly named, is protected from any defense the insurer might use to void coverage as a result of the action or inaction of the named insured. (SOP 50 10 7.1 pg. 74)

Here’s Why … Got a borrower who purposely burned down its building? It happens. I know! And let’s say the borrower’s Hazard Insurance excludes arson or other dishonest or illegal actions of the named insured. As Loss Payees, the policyholder and the lender get nothing. Fortunately, your astute Chief Credit Officer made sure that your financial institution’s Credit Policy requires that it be named as a Lender Loss Payee.

Or let’s say the borrower failed to file a proof of loss from an auto collision in a timely manner. Tsk Tsk! As an Additional Insured or a Loss Payee, you’re not covered. But if you followed your  Policy and Procedures – and the SOP – you made sure you’re named as a Lender Loss Payee.

And Importantly … Each vehicle is to be named in your business auto insurance policy, by make, model and VIN. All this will make you quite unpopular with your servicing department. They’re already counting the hours to be consumed in tracking insurance, cajoling borrowers to renew their auto policies before they expire, or trying to find out who insures that Subaru Solera now that you know the previous policy was canceled.

I  feel your pain. It may be that your financial institution considers the value of the vehicles it liens to determine whether the effort of tracking auto insurance is worthwhile. Well, the other day I read an article saying that allowing insurance to lapse, and the collateral is subsequently destroyed, is one of the top reasons for a repair.

Now, you can answer the “additional insured” question: You should not be listed as an Additional Insured. You should not be listed as a Loss Payee. You should be listed as a Lender Loss Payee. One word. Big difference.

Richard Jeffrey, Senior Associate
Chief Underwriter