As a private lender, it’s easy to feel a sense of comfort once your loan is secured by real property. After all, if the borrower defaults, you have remedies, foreclosure, trustee’s sale, or other legal action designed to protect your investment. But have you stopped to consider what happens if the property itself suffers significant damage before you ever exercise those remedies?
Weather events, fires, floods, accidents, vandalism, or even theft can quickly erode the value of the very collateral that secures your loan. If the property is damaged or destroyed, you are left asking two critical questions:
- Will the borrower’s insurance cover the loss?
- If not, does the borrower have the financial ability to restore the property and still repay your loan?
The answer is often less reassuring than you think.
The Illusion of Safety
Many lenders assume that simply requiring an insurance policy is enough. Escrow will usually collect proof of insurance and ensure the lender is listed as a loss payee. But that’s only part of the picture. The presence of a policy doesn’t guarantee that the coverage is adequate, or that it even applies to the type of risk most likely to impact your collateral.
Why Policy Review Matters
Insurance policies vary widely in what they cover—and more importantly, what they exclude. For example:
- A homeowner’s policy may exclude certain natural disasters.
- Commercial property coverage may not include vandalism or tenant-related damage.
- Flood or earthquake coverage often requires a separate policy.
Without careful review, you may not realize the borrower’s policy leaves gaps that could seriously impair your ability to recover if something goes wrong.
Protecting Your Investment
As a private lender, you don’t need to become an insurance expert, but you do need to ensure:
- Adequate Coverage Limits: Coverage should at least equal the replacement cost of the improvements or the loan balance.
- Proper Endorsements: Your lender’s loss payable clause must be in place so your rights are protected if a claim is made.
- Coverage Type: The policy should match the nature of the property—residential, commercial, rental, or otherwise.
- Exclusions & Deductibles: Understand what’s not covered and whether those gaps expose you to risk.
The Bottom Line
Your remedies as a lender only have value if the underlying collateral has value. Ensuring that insurance is both in place and properly reviewed is as essential as recording the deed of trust.
At Geraci LLP, we work with private lenders every day to structure loans that don’t just look secure on paper but are truly protected in practice. Reviewing insurance coverage is a small step that can prevent devastating
