Real estate lenders require borrowers to maintain property insurance with a certain level of coverage to ensure the bank’s interests are protected if the property is damaged.

With loan costs increasing thanks to rising interest rates and property insurance premiums, loan payments may become unaffordable for some borrowers, and it may be tempting for these borrowers to stop paying insurance premiums or cut back on coverage.

However, commercial real estate owners may not realize that if their property-casualty insurance lapses or their lender deems coverage insufficient, force-placed insurance coverage will be applied to the loan. Such coverage is expensive—and doesn’t offer actual insurance against property and casualty damage for the borrower.

A forced-placed insurance policy isn’t a choice

Force-placed insurance policies, also called creditor-placed or lender-placed insurance,1 come with expensive premiums and penalties. This coverage does not cover the borrower in the event of a claim but rather the lender in case of a default.

The premium is added to a borrower’s loan, which can significantly increase the monthly payment while only protecting the lender’s financial interest in the property. Borrowers must then obtain and provide proof of adequate coverage to the lender to have the force-placed coverage removed.

Since the start of the COVID-19 pandemic, lenders have shown leniency towards commercial real estate owners and managers struggling to make payments, but those days are coming to an end. Borrowers behind on their payments or making changes to their loans should be careful they don’t end up paying more for less coverage.

How to avoid a force-placed insurance policy

Borrowers can avoid paying for force-placed insurance by taking a few preventative steps:

  • Ensure property insurance coverage meets loan requirements with your insurance broker: Commercial real estate borrowers must understand the lender’s insurance requirements agreed to under the loan terms and that the policy secured meets those requirements. For example, lenders are likely to require borrowers with properties in catastrophe-prone areas to maintain a certain level of fire or wind coverage and will force-place coverage if the policy is insufficient.
  • Don’t wait until the last minute: It is critical that real estate owners allow ample time to secure needed coverage. This helps to avoid delays in loan funding and gives the borrower a better chance at finding coverage. Borrowers should not scramble at the last minute or end up with inadequate coverage that leads to the lender force-placing the insurance.
  • Ensure lender has certificate or proof of insurance: A borrower does not find out the lender has force-placed their insurance until they see it on their loan statement. But borrowers may have coverage force-placed despite having an appropriate policy. To get the force-placed insurance removed, a commercial real estate owner must prove their insurance was placed correctly and meets the loan covenant requirements. Borrowers should always contact their lender to confirm that the certificate of insurance was sent properly and received.

Contact a HUB International real estate expert to review insurance policies and ensure you’re fully covered.

1 National Association of Insurance Commissioners, “Lender-Placed Insurance,” August 25, 2021