A recent and well-publicized lawsuit against a lender shows our appetite for headlines even extends to insurance issues. Yes, insurance. My comment here is NOT about the merits of the lawsuit. (I’m not evening giving you a link to it.) Instead, I marvel at the headline, and our ability to not focus on another very large and very important insurance problem: the fact that more often than not, a lender can NOT obtain reliable evidence of property insurance before it finances commercial real property. Millions of dollars are funded with the “hope” that appropriate insurance is in place. Hope Insurance. Commercial lenders sail away from closings “hoping” that the insurance policy is as promised. This very dangerous disconnect, between the insurance industry’s refusal to furnish a certificate that a lender may rely upon and the need of the commercial real estate finance industry for reliable evidence, will never be a banner headline. Until the unthinkable happens – perhaps when an insolvent insurer simply refuses to honor policy, after policy , after policy. Or perhaps when investors or regulators stop ignoring this situation and . . . . It is, however, a situation that has many volunteers in the finance industry working hard to resolve. I’ll unpack the disconnect:
- commercial mortgage lenders are not able to verify, review and rely upon evidence that the borrower has appropriate property insurance in place, which is needed when the lender originates the loan, or as the servicer accepts replacement insurance
- insurance industry groups refuse to approve an insurance certificate (verifying insurance) that may be relied upon
- the problem has been discussed at length, for several years, in key industry (insurance and finance) groups
- compounding the problem, there are legitimate concerns of the unauthorized issuance of insurance policies (my early posting)
- . . . the problem remains unresolved – since 2006 (MBA announcement)
- so now it is being addressed on a a one-state at time basis – at the legislative and regulatory level in each state
Verifying the existence of appropriate property insurance is an important element in financing commercial real estate because the collateral . . . is the commercial real estate. (Moody’s paper on modeling commercial real estate risk.)
- If verifying insurance is NOT important, then . . . why buy it? Why is there a market to sell it?
Insurance contracts (policies) are very, very complicated. Indeed, commercial finance lenders and servicers have insurance experts on staff so that if and when they receive a policy, they can review and understand it. (My 2009 post of a short overview of insurance basics for commercial lenders and servicers illustrates the complexity of insurance.)
- But why are we making it so difficult to deliver reliable evidence of insurance; or to present the actual policy when needed (at or before the loan closing)?
- Are tech dollars (solutions) simply being allocated to the consumer side of the insurance shop, and not to the commercial side of the tech platform in insurance companies? (Just guessing.)
To the volunteers who work for a resolution of this dangerous disconnect: THANK YOU. IN YOU WE HOPE. To the rest of us who find entertainment in banner headlines: it is understandable, but not excusable