It is standard practice for commercial mortgage lenders to be added to their borrower’s Property or Builder’s Risk insurance program as both a Mortgagee and Loss Payee. Both clauses provide specific rights to the Lender under the policy to protect their interest in the secured property. Specifically, the Loss Payable clause provides that the insurance proceeds shall be paid to the Lender as “its interests may appear”, while the Standard Mortgage Clause ensures that the Lender will receive payment even if the borrower has breached a condition of the policy. In the United States, the Lenders Loss Payable clause may also be used to provide these same basic rights.
By virtue of these naming rights, Lenders should be automatically included in any insurance settlement discussion following a loss. These discussions are important because, during this time, Lenders may be able to assert their right under the loan agreement to either take the insurance proceeds to pay down the outstanding debt, or release the funds to pay for the repair or replacement of the security property. While it is usually in everyone’s interests to repair or replace the damaged property, there are situations in which the Lender’s ability to control the insurance proceeds represents their last chance to easily recover their investment.
Unfortunately, adjusters and insurers often overlook, or totally ignore, the Lender’s position in the borrower’s policy and then fail to include them in the settlement discussion. As such, we recommend that Lenders proactively assert their rights under the policy as soon as they become aware of a loss. To do so, Lenders should contact the insurance adjuster assigned to the claim and/or the insurance broker or insurance company directly to assert your rights as both a loss payee and mortgagee under the policy. In doing so, be prepared to provide an excerpt from the loan agreement as evidence. That said, please do not hesitate to reach out to one of our experienced Risk Consultants for additional guidance and/or assistance through the claim.
INTECH Risk Management (“INTECH”) is an independent insurance consulting company involved in the analysis, design, development, implementation and management of insurance programs. INTECH does not sell insurance, nor is it affiliated with any insurance company or brokerage. This unique independent position in the marketplace enables our consultants to avoid conflicts of interest and provide our clients with unbiased, expert advice. INTECH has been the 2015 and 2016 winning recipient of the IJGlobal Americas Due Diligence Provider of the Year Award.
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