Katie O'Brien, Esq.

Most lenders are aware that they must require their borrowers to carry appropriate insurance coverage on all collateral securing their loan. Lenders know that correctly documenting insurance coverage is vital to protect the lender's interest in its collateral as well as to comply with the terms of the SBA Authorization if the lender is an SBA lender. But some lenders may be inadvertently relying on outdated practices to document insurance coverage which could put the lender at risk.

Many lenders require their borrowers to simply provide them with ACORD certificates of insurance to document the insurance coverage that a borrower has in place. Some of the more common certificates of insurance are the ACORD 25 ("Certificate of Liability Insurance"), ACORD 27 ("Evidence of Property Insurance") and ACORD 28 ("Evidence of Commercial Property Insurance"). But don't let the title of these certificates fool you. ACORD certificates explicitly state that they are issued "as a matter of information only" and they "confer no rights upon the additional interest" named in the certificate. The certificate also states that it "does not amend, extend or alter the coverage afforded by the policies." Coverage can only be amended through the actual policy (or binder, for newly written coverage) and its endorsements. Therefore, although ACORD certificates are helpful for verifying that a borrower has insurance in place, the certificates are meaningless unless lenders also obtain a copy of the borrower's insurance policy as well as all endorsements to confirm that the information set forth on the certificates is correct.

In order to be in compliance with the SBA authorization, a lender must be named "mortgagee" on the policy if their collateral includes real estate, and "lender's loss payee" if their collateral includes personal property. Although an insurance agent may issue an ACORD certificate showing a lender named as a mortgagee or lender's loss payee, the lender may not be afforded the privileges and benefits of those designations unless the policy is actually endorsed to add the lender as a mortgagee and lender's loss payee. As the certificate states, its confers no rights upon the additional interest named in the certificate unless the policy itself confers such rights and the company is likely to defend any claims brought by a lender that is not properly endorsed on the policy.  

The SBA authorization also requires that all casualty insurance policies "must provide for at least 10 days prior written notice to Lender of policy cancellation." Older versions of ACORD certificates specifically stated that the agent would "endeavor to mail ___ days written notice to the certificate holder" and agents would often fill in the number of days that the lender requested. But the most up to date ACORD forms state that if any of the policies listed on the certificate are canceled before their expiration date, "notice will be delivered in accordance with the policy provisions." This change reflects the fact that the cancellation provisions in the policy itself instruct an agent who they must notify and how many days notice they are required give, which may differ depending on the reason for cancellation. An insurer is not obligated to notify any third parties of notice of cancellation, even those named additional insured on the policy, unless the actual policy provides for such notice. This is just one more reason for lenders to obtain a copy of the coverage and notice provisions of the policy in addition to an ACORD certificate.

So how can a lender make sure it receives a cancellation notice so that it is fully protected and in compliance with the SBA's requirements?

• The best solution is to request that the insurer endorse the borrower's policy to add the lender as a cancellation notice recipient through an endorsement to the policy;
• If the agent will not do so, a lender may want to contractually require the insured borrower to provide immediate notice of cancellation to the lender; or
• As a last option, a lender may choose to require frequently updated certificates of insurance to make sure coverage is still in place and that there have been no significant changes to the coverage.  

If a lender is unable to get the insurer to provide notice of cancellation and the lender must choose an alternative option, the lender should, as always, document its file with the steps the lender took to comply with the SBA's notice of cancellation requirements.

Although ACORD certificates provide valuable information to lenders, it is important that lenders also obtain a copy of borrowers' insurance policies and all endorsements to confirm that the lender is named mortgagee, lender's loss payee and additional insured, as applicable, and to confirm that the lender receives notice of cancellation of the policy. Failing to obtain such documentation could be a very costly mistake for a lender if collateral is damaged or destroyed or if the borrower is sued and does not have the proper liability insurance coverage in place.

For more information regarding SBA insurance documentation, please contact Katie at kobrien@starfieldsmith.com
or (215) 542-7070.

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