Small Business Administration ("SBA") loans are commonly secured with a lien on equipment, fixtures, or inventory. In these circumstances, the SBA requires that the borrower's business personal property insurance contain a lender's loss payable clause in favor of the secured lender. Although this seems like a simple requirement, it is important to recognize the differences between "lender's loss payable" and "loss payee". While the terms sound similar, there are practical benefits to having a lender's loss payable clause and potential negative consequences associated with being named loss payee.
If a lender is designated as a loss payee on a borrower's insurance policy, lender is only entitled to insurance proceeds if the borrower sustains a covered loss and borrower is entitled to payment under the policy. However, the lender receives nothing if the insured borrower fails to comply with policy provisions or commits a wrongful act that causes the policy to become void.
With a lender's loss payable endorsement, a lender is entitled to collect insurance proceeds even if the borrower does not comply with the terms of the policy or if the policy becomes void for any other reason. Additionally, a lender named as lender's loss payable will typically receive 10 days' prior notice if the policy is canceled for nonpayment, 30 days' prior notice for cancelation for any other reason, and 10 days' prior notice of non-renewal of the policy. Finally, the lender is entitled to payment even if the lender commences foreclosure proceedings against the insured.
If an SBA loan is secured with a lien on equipment, fixtures, or inventory, a lender's loss payable endorsement is not only an SBA requirement, but also has practical advantages that are more protective of the lender than the lesser loss payee designation. It is important for lenders to obtain a copy of the borrower's i nsurance policy and proper lender's loss payable endorsement to protect lender's rights under the policy.
Lewis Kappes proudly represents lenders and banks involved in SBA financing, as well as other commercial lending matters. For more information regarding insurance coverage for SBA loans, please contact: