Insurance is an important tool used to protect the investment that a borrower and lender make in a property. In an ideal world, borrowers and lenders agree exactly upon the level of risk that is appropriate, and compliant insurance is readily available. Unfortunately, however, that is not always the case.
Evolving Insurance Market Affects Coverage
Both the insurance and lending industries evolve to address changes in risk—often in opposite directions. The riskier something becomes, the more lenders need it covered and the harder it is for borrowers to find affordable coverage in the insurance market. Carriers make updates to policy forms or may become more restrictive in providing information, depending on what they feel aligns with insurable interests. Furthermore, the borrower may feel comfortable taking on more risk than the lender permits or they may have blanket coverage over their entire portfolio of properties, adding complexity to the coverage and making it harder to make changes for specific locations.
Annual Insurance Review Keeps Borrowers Compliant
Each year, NorthMarq completes a review of the insurance provided by the borrowers or their tenants to ensure that it is in compliance with lender requirements. NorthMarq’s lenders each have their own specific set of insurance requirements, which can be tied back to how they view risk related to insuring the collateral for their loans. We ensure that the requirements we track are in line with the loan documents, third-party reports, leases (if tenant coverage), and any other documentation the lender has specified. NorthMarq, in turn, has Servicing Agreements with each lender that govern how we review insurance certificates and policies for compliance. Additionally, we look at what coverage was provided previously to understand the history of the coverage on the property.
After confirming the lender’s requirements, we review the current insurance certificates or policies relative to the requirements in order to ensure that all items are addressed. With this process, we occasionally come across insurance that is not compliant. When this happens, we will work with the agents and borrowers to get the insurance into compliance.
What Happens in Cases of Noncompliance
Sometimes due to market availability, high premium increases or property-specific reasons the agent or borrower is unable to comply with the lender’s requirements. In these instances, we may assist the borrower in requesting a waiver from the lender.
Lenders have varying appetites for waiving an insurance requirement. Some have zero tolerance for waiving any of their requirements. Others are willing to consider a request should it make financial sense and after thoroughly considering the risk. In these instances, NorthMarq’s analysts can assist the borrower with putting together a request for waiving a requirement and help with collecting the necessary backup information to assist the Lender in evaluating the risk of waiving an insurance requirement. This additional information includes, but is not limited to, quotes for compliant coverage, current financial statements, rent rolls and personal financial statements.
The lenders will examine loan and property-specific items such as the loan-to-value, current unpaid principal balance, property condition, financial impact and the borrower’s ability to self-insure the requirement. These items are compared against the “worst-case scenario,” an occurrence happening with the requirement being waived, and the likely outcomes should the “worst-case scenario” actually occur. A significant emphasis is placed on their return of principal and the ability to continue to collect payments through maturity, as well as the property’s financial performance.
If approved, the lender will sometimes attach a condition to the approval, such as compliance in the following year or the collection of any outstanding loan-related items. If, however, the lender is unable to accept the risk associated with the noncompliant coverage, the borrower must obtain compliant coverage.
How We Can Help
NorthMarq’s insurance staff strives to stay up-to-date on all insurance requirements and what our lenders are willing to accept in the area of insurance waivers. If you ever have any questions related to a waiver request, please contact your designated insurance representative.