The ravages of the recent hurricane season served as a wake-up call to many lenders and their professionals about problems and pitfalls when collateral is not appropriately and necessarily insured as well as when the lenders do not have the necessary rights concerning insurance recoveries. Too often, lenders found that they had not focused on the uniqueness and special needs of certain types of collateral securing loans and that, to their dismay, they were not adequately protected.

Review All Insurance Policies Before Closing a Loan. In too many instances lenders that have collateral insurance requirements in loan documents only require the borrowers to provide certificates of coverage before closing the loan. Not all insurance policies are the same. If collateral securing a loan is to be covered by insurance, the lender and its professionals should review the insurance policies itself before closing the loan and not just the insurance certificate. Additionally, the borrower and the lender should notify the insurance carrier not only of the lender’s collateral interests, but also to require the insurance carrier to inform the lender if any terms in the insurance policies are changed or modified or any of the insurance policies are canceled.  The lender should also make sure that the start date of coverage is no later than the date the loan closes and that the insurance carrier meets minimum rating requirements.

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