At JRB, we frequently do annual reviews of commercial loan portfolios, conventional and SBA. Exceptions vary portfolio-by-portfolio, but time and again, we see issues related to whether the property is properly insured. There are too many insurance-related issues to address in one eBulletin, but are you sure your portfolio is free of the common errors listed here? If not, better clean them up before the next independent loan review – or worse, regulatory review! – finds one or more of these:

Insurance Never Obtained. Yes, this happens more often than anyone wants to admit. At loan closing, the borrower signs an “Agreement to Provide Insurance” so nicely printed and properly filled out, complete with the insurance agent’s name. The Agreement is then properly filed in the servicing file under “Insurance.” But it’s never sent to the insurance agent. This happens more on conventional commercial loans than SBA or residential loans. Unless you send the Agreement to the insurance agent, most likely you won’t be added to the policy. Can you sleep at night, not knowing whether your collateral is insured?

No Evidence the Lender Has Been Added to the Policy. Does your lending institution accept ACORD forms as proof of insurance?  If so, better  check out that disclaimer right at the top. It specifically says, in great big bold capital letters: “THIS EVIDENCE OF PROPERTY INSURANCE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE ADDTIONAL INEREST (sic) NAMED BELOW. THIS EVIDENCE OF PROPERTY INSURANCE DOES NOT AMMEND (sic), EXTEND OR ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.”

What it means: “Here’s a piece of paper that gives you no rights and does not “ammend” (sic) or alter the policy.” It’s information. There may or may not be a policy, but you have no rights to it. So if you’ve been accepting ACORD forms as proof of insurance, you might as well take them out of your loan files and shred them. They’re worth more as confetti for packing boxes than anything else. To be properly insured, you must have the policy or dec sheet showing that your  lending institution is named.

Business Personal Assets, e.g., Equipment, Not Properly Covered. Hey, Mr. Loan Reviewer:  Look right here. See?  Your lending institution is listed as “Loss Payee.” Yes, indeed you are, Banker Buddy. That gives you the same rights as the insured party. And in the event your equipment is damaged by, oh, say, fire, you can make a claim…unless of course the fire was caused by arson or any other exception from coverage named in the policy. What are the exceptions? Read the policy. By the way, this is another deficiency of ACORD forms: There’s no box to mark “Lender’s Loss Payee.”

If you think your commercial loan portfolio might have one or more of these common errors, you’re not neurotic. Odds are, you’re right. So stop what you’re doing and check out the Insurance Tab in your servicing files. Then you can sleep peacefully at night.

Next, contact JRB to do your loan review, knowing you’ll have none of these issues noted as “exceptions” when we wrap up the review.

Richard Jeffrey
Senior Associate, CDC/504 Program
richard@jrbrunoassoc.com
www.jrbrunoassoc.com