At JRB, we perform annual loan reviews for lenders across the country. Yet often we get questions from lenders asking why their reviewer criticized one thing or another – even if we’re not performing their review. Among the most common questions: “The review says that we didn’t take ‘all appropriate’ insurance. What does that mean?”

It’s common for us to see lenders requiring 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. However, SBA requires lenders to include “all appropriate insurance requirements” and lists the types of insurance they should require if appropriate:

  • Liability Insurance
  • Product Liability Insurance
  • Dram Shop/Host Liquor Liability Insurance
  • Malpractice Insurance
  • Disability Insurance
  • Workers’ Compensation Insurance
  • And any state-specific insurance requirements

Appropriate: Fitting, Apt, Proper?  It’s Easy. Determining if the insurance fits the loan shouldn’t be complicated. For example, it’s appropriate for a liquor store or bar to have Dram Shop/Host Liquor liability insurance. So you should include it as a requirement. If your borrower runs a horse stable, liquor liability insurance isn’t required. By the same token, a medical practitioner needs malpractice insurance and probably can’t practice without it. Then a loan to a medical practitioner requires Malpractice Insurance.

Most states require Workers’ Compensation insurance. But even in states that don’t require it, you should ask, “Is it appropriate for a business with employees to have Workers’ Comp?” I know about a case where a retail store employee fell off a ladder when she was stocking shelves. Fortunately she recovered. And fortunately the business had enough Workers’ Comp to cover her injuries. Requiring Workers’ Comp might not be appropriate if the only employees are the owners of the business. Otherwise, yes, Workers’ Comp is appropriate regardless of whether the state requires it.

It takes less than 20 seconds in most cases to go through the list above and determine what insurance is appropriate. If you conclude that a specific coverage isn’t appropriate, I recommend including a sentence in your credit memo to that effect: “Lender has determined that XXX insurance is not required because XXX.”

Bottom line: This isn’t hard work.  If you can’t justify why insurance shouldn’t be required – then it probably is.

Richard Jeffrey
Associate, CDC/504 programs