By: Jeffrey S. Feldman, Esq.  

 

 

Jeffrey S. Feldman, Esquire

Generally, prudent lenders should ensure that all collateral with a significant recoverable value is adequately insured in order to protect the ability to recover the value of the lender's interest in the collateral in the event of a casualty. The SBA's standard operating procedures for loan servicing provide additional guidance on this issue by stating that the purchase of hazard insurance may be necessary when all of the conditions of a seven factor test exist. See SBA SOP 50 50 4, at Chapter 5, ¶ 18(f), p.5-24 (setting forth the seven factor test). If the required seven factors are all present, the force placed insurance premium is generally considered a recoverable expense. See SBA 50 51 3, at Chapter 19, ¶A(2)(d)(2), p.131.

A lender who is deciding whether to force place insurance should begin by addressing some basic considerations. First, the SBA will rarely share in the cost of liability insurance. Liability insurance is typically not an issue of concern for the SBA because the lender would not be liable for liability claims or judgments against the borrower, and any judgment lien against the borrower will generally be junior to the lender's properly recorded lien. It is far more common for the SBA to share in the cost of hazard insurance to protect the value of the collateral against the risk of casualty.

 Second, the lender should determine whether the value of the collateral exceeds the total amount of senior liens in favor of other creditors. In other words, is the value of the collateral sufficient to allow for a financial recovery by the SBA lender? This question is the first factor in the SBA's seven factor test, and it's obviously a key issue. If the property does not have sufficient current value in excess of the value of any prior liens, there is no value in the lien securing the SBA loan and, therefore, there is no insurable interest for the SBA to pay to protect. Likewise, if the value of the property is only sufficient to satisfy a portion of the SBA loan, the SBA will only reimburse where the amount of the hazard insurance policy matches the insurable value (i.e., the amount of recovery the lender could expect), not the total amount of the loan. The lender may need to obtain a more recent appraisal to justify and document its decision. (It is important to note that, if an SBA lender is in a junior position on a property, it cannot rely upon the senior lienholder to protect its interests. A prior lienholder may force place its own hazard insurance, if necessary, but if it does, it will likely insure only the value of its own lien, leaving the SBA lender's junior lien interest uninsured.)

Third, if the property does have sufficient value to justify force placing hazard insurance, an SBA lender should determine whether it can adequately document its justification for incurring the expense and prove its compliance with the applicable SOP in its eventual Care and Protection of Collateral ("CPC") Tabs submission.

Servicers of SBA loans who are deciding whether to force place hazard insurance for the loan collateral should carefully consider both the value of their insurable interest in the property and the requirements of the applicable SOPs before purchasing a policy. While having a general policy of force placing hazard insurance on SBA collateral may seem prudent, the SBA's rules require a more nuanced and case-specific approach.

For more information regarding force placing insurance for 7(a) loan, please contact Jeff at (215) 542-7070 or at JFeldman@StarfieldSmith.com.