Don’t Let Insurance Hold Up Your Loan Closing – Part 2: Education

In my last article, Part 1: Communication, I stressed the importance of communication between you, your agent, and your lender. Now that we’re all expert communicators who won’t wait until the last minute ever again - what do all these terms they’ve been talking about actually mean?

By this point in the process you’ve probably seen or heard all these words: Dec Pages, Acords, Certificates, Evidences of Coverage, Proofs of Coverage, COIs, EOPs, Policies, Endorsements, Loss Payee, Lenders Loss Payable, the list goes on. I promise I’m not going to go through them all (even this Insurance Nerd would die from boredom), but I do want to explain a few and why they matter to your business. Too many of these words are commonly used by the legal system, financial institutions, and the insurance industry as all-encompassing terms when they really aren’t interchangeable. So if they don’t fully understand these terms, how are you supposed to?

First a little history - Years ago if you were getting a business loan, proof of insurance wasn’t necessarily required in order for your loan to close. If it was needed, your agent sent over proof that showed the bank as a Loss Payee. The problem was neither the lender, nor the insurance agent, really explained what was covered and how that affects you, your payout, and the lender’s rights to recover in the event of a claim. Enter the attorneys! Every time a new banking regulation or insurance endorsement comes around, you can probably thank an attorney. Once a loophole in a contract is figured out, another attorney makes contract wording changes to try and prevent the same scenario from happening again. (Think how fast food coffee cups now have to have a warning label on them). Long story short, the language in lender’s contracts and insurance policies has become very specific because both industries have had unanticipated losses based on ambiguous contract language.

Let’s start with something that sounds a lot more complicated than it really is. The words Dec Pages, Acords, Certificates, Evidences of Coverage, Proofs of Coverage, COIs, EOPs, Policies and Endorsements. These are all just terms that show proof of your business insurance coverage in one way or another. If someone is asking for these things, they probably just want to see proof, in writing, that you have insurance. I'll try to not get too technical as I go down the list of basic differences here:

To show proof of Property coverage, typically your agent will issue an Evidence of Property (aka EOP) on an Acord 27 or Acord 28 form with the 28 now being more preferred. Both forms show your property policy limits, deductibles, locations, and coverage and also have a place to list the lender as Mortgagee, Lenders Loss Payable, or Loss Payee. For proof of Liability coverage, agents typically issue a Certificate of Liability on an Acord 25 form – these are commonly referred to as Certificates, Certs, or COIs. Similarly this form shows the coverage and limits of different policy types and also has a place to name the lender as a Certificate Holder and designate them as an Additional Insured if required. These are all done by your agent’s office and are considered informational only (and that's a whole other article for a whole other time).

A Policy is the actual small-print booklet that explains all the coverage and ranges anywhere from 30 to upwards of 300+ pages. It is rare that the lender actually needs the policy, no one (including your agent) wants to read all that! Dec Pages and Endorsements are the other commonly misused terms. Both are just parts that make up the actual policy. Dec Pages , or Declarations, are usually in the front of a policy and show the business name, policy dates, limits, a list of endorsements, and annual premium. It can range from 2 to 20+ pages depending on your industry. Endorsements are found all over in the policy and are used to actually change the coverage. By your lender requesting to be added on to your policy as a Loss Payee, your insurance agent makes a request to be added by the insurance company, and they actually go in and add a few pages to the policy showing the lender's interest and then that endorsement language outlines how they are paid in the event of a loss. Most lenders do not require Dec Pages or Endorsements. However, many institutions are starting to request and review them to confirm they are covered correctly because you guessed it - they have had coverage issues with their claims!

This brings me to where I see the majority of problems coming from - there has been a shift in lenders requiring to be named as Lenders Loss Payable instead of Loss Payee. While the words may sound very similar, there is a big difference between the two in how the insurance policy protects and allows the lender to recover, in the event of a loss. So what is the difference?

If the lender is named as a Loss Payee on a policy and a covered loss happens, your insurance carrier issues a check made payable to you and your lender. Makes sense, you both are protected. But, if due to any non-compliance, wrongful act, or omission, the insurance company would not be required to pay you, then the lender would not receive payment either. I’m sure you can see why that might make a lender uncomfortable.

Now on the other hand, if a lender is added as a Lender’s Loss Payable, and covered loss occurs, the lender would have the right to get paid, regardless of any non-compliance, wrongful acts or omissions on your part. And it goes even further and stipulates that the insurance company will send the lender notices in the event of a cancellation (non-payment or other reasons) or if the insurance company decides to non-renew. Clearly there is much more protection for the lender here which is why it's becoming a more widely accepted request.

A simplified example outlining the difference would be in the case of arson. If you intentionally burn down your business, the insurance company will deny your loss and if your lender is a Loss Payee, they probably aren't going to get paid and they are out the amount of their loan. If they were instead listed as Lenders Loss Payable, they would be able to recover the amount of their loan under your policy even though the insurance company would deny coverage.

I know this is a lot of information that probably doesn't really matter too much to you - so what are the takeaways:

• Cost: As far as cost goes, neither typically Loss Payee or Lenders Loss Payable have any charge. The insurance company checks the box in Part 2 instead Part 1 of the endorsement, that’s literally it. 
• Claims: Since you are an honest borrower who won't be committing arson, in the event of a claim, the check is made payable to you and your lender in either case
• Problems that can hold up the closing:

1. Communication: The most common problem I see usually go back to the request not being clearly spelled out when Lenders Loss Payable status is required. Remember, the agent’s first priority is to protect you (not your lender), so they’re not going to give more coverage under your policy without being specifically asked. 
2. Education: The other problem is sadly due to a lack of awareness of the differences of Loss Payee and Lenders Loss Payable wording among agents. Not all agents have the same education, training, and experience, so I hate to say it, but they may just not know. If you get the feeling that’s the case, I would encourage you to ask your agent numerous questions until you are confident in their answers, or if you aren’t feeling sure, reach out to another agent for a second opinion.

I know this was a long and technical article, but if you made it this far, congratulations!! Between my first article Don't Let Insurance Hold Up Your Closing - Part 1: Education and this one, you now have tips and insight in to what is really going on. This will make your lender's and agent's jobs easier which in turn makes your closing smoother and leaves you more time to focus on what you do best, actually running your company!

Tiffanie Demasters, CIC, PRIS, has spent the last 17 years in the insurance industry. She started her career handling auto claims, then became a Personal Lines Agent with a captive agency, and now works as a Commercial Insurance Producer for one of the largest bank-owned independent insurance agencies in the nation.