Lender "Mortgagee Clause" vs. "Additional Insured" on Insurance Policy to Property a

[Rogelio M.]

Ref: Lender "Mortgagee Clause" vs. "Additional Insured" on Insurance Policy to Property as Collateral

How specifically should a private lender be mentioned on the owner's insurance policy to a property used as collateral to a loan. I want to assure that I, as the Lender, get paid FIRST if there is an insurance payout. I also want to avoid the insurance company issuing out a payment in both the names of the Lender and property owner .... which could lead to a dispute.

For context, I lent money privately to another investor, who put up their non-homestead property as collateral. At closing a Note was issued and a Mortgage/Deed of Trust were issued showing the Borrower (Investor's) indebtedness to me, with a Mortgage/Deed of Trust showing my rights as Lender over the Borrower's property.
I have received mixed recommendations on this topic and am looking for guidance that is consistent.

Specifically, I lent money and had the investor/borrower/property owner place me as "Mortgagee" on their property's insurance policy. My assumption was that if, let's say, the structure burnt down, the property's insurance would then pay me out FIRST as the lender and NOT issue a check in both the Lender's and Property Owner's name. Am I correct in this assumption? If not, how do I avoid this?

Other advice I received was that I should have also placed myself as "Additional Insured" on the Borrower's insurance policy, in addition to the Mortgagee clause. What role does being named "Additional Insured" play within the context of a Lender?

What is the optimal way to proceed?!

Any advice would be welcome!  Thank you all kindly!

[Mike Grudzien]

Rogelio,

I would check with a local Title Company to ask generally what they have seen in the past.
Check with an insurance agent, even specifically the borrower's insurance agent, as to required terms.
Finally, armed with that info: work with an attorney to draw up ironclad docs.
My 2 cents,
Mike 

[Jeff S.]

Insurance is easily the most confusing topic in private lending, @Rogelio M.  If you speak to 10 insurance agents, you will receive at least 12 opinions. What’s worse is that there is no consistency among the insurance companies.

The ACORD forms and other Evidence of Insurance documents are notoriously cryptic and difficult to read. Insurance companies all seem to have different names for the same coverage terms, so it's hard to know what you have. I've read hundreds of these and usually call the agent for an explanation to ensure we're protected. You should do the same.

At a minimum, you want to be named as the Mortgagee on your borrower’s property and liability insurance policies. Alternatively, some insurers will use the term Loss Payee. This is a more general term used by some insurers to cover all lenders. For example, if you were making car loans, you would still be a lender but without a mortgage. Thus, the broader term. To cover ourselves, our insurance criteria require us to be named as the Mortgagee and the Loss Payee. Some companies will do this. Mortgagee is preferred, but either term is acceptable.

Additional Insured puts you at the same payoff level as the borrower. You want to get paid in your name only, as the Mortgagee or Loss Payee.

With the huge range in costs, and dramatic price increases, borrowers are notorious for skimping on insurance. For example, many will obtain a homeowner’s policy for a vacant flip – at about 1/3 the cost. No one is covered here even though the insurance company will write the policy and take the premium. It’s similar if a landlord or another specialized policy is required. If there is any question about the type of policy and the coverage, call the insurance agent to confirm. Never rely on what others have seen. You have too much to lose here.

Lastly, make sure the policy guarantees the insurance company will notify you of a cancellation within 30 days, at most. This might involve a separate endorsement, so ask.

You didn’t mention the owner and lender’s title insurance policy. A different topic, but equally important.

Ironclad docs, indeed. I hope you require more than a Note and Mortgage to protect yourself, Rogelio.

[Peter Walther]

I suggest you start by reading the insurance policy, starting with the definition section which should tell you who is insured.  I'd also carefully read the section on how the loss payment is made.

[Rogelio M.]

@Mike Grudzien 

Mike I appreciate your '2 cents'!  I have mixed information on this.  Checking with a Title Company and the insurance agent are good ideas!  Rogelio.

[Farley Youman]

Great advice Jeff.  I set up loans for lenders and they are very diligent on exactly how the insurance is written up.  The best thing about setting up loans is not only do you make money (and cannot lose money)- perhaps the best thing is how much you learn as a loan rep (especially if you are new to real estate). Just looking through the emails from the lenders to the insur. comapany will show a lot of what makes up a great insurance policy. Finally, look at lenders that have been doing this a long time- they have insurance companies that they usually use (if the client agrees) that know exactly how to write it up based off of the lender's stringent guidelines.

[Rogelio M.]

@Jeff S. 

Jeff, thank you kindly for the information.  Certainly, one, as a lender holds most sway PRIOR to issuing a loan, where one can impose/require all of these safeguards.  I am having trouble with my borrower, and this experience is serving an in depth master class learning experience  ;-)  I may have to move forward with a foreclosure.

Within the context of what you have outlined, what then is the difference between Mortgagee/Loss Payee vs. Additional Insured?  What protections would I have being named as Additional Insured, that I would NOT have as Mortgagee/Loss Payee?

I have also heard that one, as a Lender, can obtain a SEPARATE insurance policy naming only the Lender as the insured.  The Borrower would obtain a separate policy.  That way, if there is a loss, the insurance company covering the Lender will disburse the funds only in the name of the lender.  Is this a viable option?  If not, what about this option is not viable? 

I noted your comment regarding title policies.  I did obtain coverage under Lender's Title, but then, I agree with you that is a whole different topic.

Thank you Jeff!

Rogelio.

[Rogelio M.]

@Farley Youman

Great observation Farley ! ... One, as a lender, could require the use of an insurance company selected by the Lender!

[Michael Norris]

Additional insured is more about extending liability coverage to a third party like a property manager. The manager by action or inaction could be sued directly or in addition to the property owner for a tenant or guest being injured.

There is an additional liability extension called personal injury or landlord personal injury that picks up the liability for a situation such as being sued for wrongful eviction or violating fair housing in some way. Not many carriers offer this but the one we use that has it extends that coverage to a 3rd party (property manager) as they are probably the one who did the thing getting you (property owner) sued for the fair housing or wrongful eviction. Having the personal injury coverage + additional insured naming the property manager extends that over to the PM.

Example - say the tenant calls in to the PM and says the front step or handrail on the house is broken. The message to the PM gets lost in the mix or isn't follow up on for repair and the tenant or guest gets injured by the broken step.

A plaintiff's attorney is going to name both the property owner and property manager to the suit because that's just what they do. Having the property manager named as additional insured extends coverage to the PM. However (I'm an insurance agent not an attorney) the legal wrangling of the PM not taking a necessary action could set up a situation where the insurance carrier pays then subrogates back against the PM company for their inaction so the property manager should also have appropriate general liability coverage for their business.

This next part can change by state and insurance carrier...

Being named as lienholder or mortgagee can set up the lender being involved on the payout of any damages - say there is a fire the checks cut for damage could name the insured and lender so both parties have to agree how those funds will be used.

Some carriers have a rule that if the loss amount is under a certain dollar amount the check is only cut in the owners name / if the loss exceeds a threshold (say $25k) the check is cut in both the owner and mortgagee names.

Being named as loss payee is literally that - the check is cut in your name or both the insured and your name. 

Being listed as mortgagee / lienholder on the policy will also set up a situation where the insurance carrier will send you notifications if the policy is canceled or non-renewed. They typically mail out a small post card notifying you if the policy cancels or is non-renewed.  

I hope that helps.

[Rogelio M.]

@Michael Norris

Thank you kindly Michael!  I appreciate your input!