Insurance Info Transparency Faces Challenges

Property insurance plays a critical role in the efficient operation of the real estate finance industry and there are severe challenges faced by our industry when there is a lack of insurance information transparency. In a typical commercial mortgage, the lender finances at least 80% of the property value, leaving the borrower with less than 20% equity in the property. The loans are almost always non-recourse. Therefore, the lender has the greatest financial risk in any loan transaction and has an insurable interest.

As part of the loan transaction, the borrower agrees in the contracts to obtain insurance that meets the lender’s requirements, to provide the lender with proof of coverage and to notify the lender of any policy cancellation. When the borrower works with its insurance agent, the insurance requirements should be communicated and adhered to in the policy. The lender will not close a loan without the proper insurance in place.

For more than 30 years the real estate industry has relied on forms like Acord 28 to provide proof of the property insurance coverage. The insurance certificate offers reliance to both the lender and the borrower that insurance is in place and will be in place for a defined period of time. It is also important to note that it is not the intention of the lender (at closing) or the servicer (at annual renewal) to expand the use of an insurance certificate or Acord beyond its customary use or the actual policy terms. In fact, the lender and servicer want the certificate to accurately reflect the policy terms for assurance that the borrower has met its contract obligations. The servicers address policy gaps, cancellations and/or inadequate coverage with the borrower when they become aware of the policy terms. In extreme cases, this can include force-placing insurance–very expensive for the borrower–and actually throwing the loan into default.