Property Insurance “Lender Loss Payee” Endorsements
Dan Harkey, Business & Finance Consultant
Evidence of insurance coverage on behalf of a real property lender that is placed on a binder, which states “additional insured, loss payee, or lender loss payee” does not provide adequate coverage to the lender under most circumstances. A binder is a legal agreement issued by either the agent or the insurer to provide temporary evidence of insurance until a policy can be issued. Binders should contain definitive overages, limits, and exact endorsements. The binder is usually delivered to the escrow or loan processor in writing and should clearly designate the insurer with whom the risk is bound.
A specific endorsement referred to as 438 BFU is required, referred to as a “Lenders Loss Payee Endorsement,” which needs to be signed by the insurance carrier and held in the lender’s files. If no specific endorsement exists, is not named in the binder or the actual policy with a reference to a specific endorsement number, then the lender’s coverage may be limited and/or disappointing.
Many lender(s) request that the insurance broker or insurer add them as an “additional insured” on the binder page or face sheet. They may be under the assumption that is all they need to do. The mere fact that the lender is named does not obligate the insurance company to do anything other than to pay an insured claim with a check naming both the borrower and the lender.
Without the proper endorsement and corresponding agreement, should the borrower default on premium payments, or should the insurer cancel the policy, there is no requirement by the insurer to notify the lender(s). The proper endorsement will create a written agreement between the insurance company and the lender.
Some lenders believe the subject of “additional Insured,” is covered in the loan documents which establish agreements between the borrower and the lender. The loan documents may contain agreements between the borrower and the lender, and state which insurance requirements to be are to be submitted. However, only with a written agreement between the lender and the insurer will create correct and specific obligations by the insurance carrier. Note that this agreement is between the lender and the insurance carrier, not between the borrower and the insurance carrier. This is an important distinction.
The original 438 BFU NS, was released May 1, 1942. Some carriers now have written their own versions. Some carriers may modify the 438BFU, and some use the form and call it by their own number.
- Allstate – AU319
- American Modern – 73259
- Crusader Insurance – USMP 1035 2-96
- Farmers – 913055
- Tower Select – HOIV 2001 0608
- State Farm FE 1313, which is essentially a 438 by a different name
Mortgage brokers and lenders should understand that this endorsement is an agreement between the lender and the insurance company. It is not an agreement between the borrower and the lender. Note, that I have repeated this. In my discussions with mortgage brokers, many simply do not understand the distinction. This agreement provides that the insurance company give notice to lenders of various actions or lack of action such as non-payment, modification, or cancellation. This agreement requires the insurer to accept a payment from the lender in the event of borrower premium payment default.
Form 438BFU NS provides for 9 specific assurances:
- Loss or damage will be paid to the payee named on the first page of the policy in whatever forms its interest may appear.
- The insurance under the policy will not be invalidated or suspended a) by any error, omission or change respecting ownership, b) by the commencement of foreclosure proceeding, c) by any breach of warranty, omission, or neglect by the occupant.
- In the event of failure of the insured to pay a premium, the insurer will give the lender notice of non-payment at 60 days and at 120 days and the lender will have 10 days after receipt of the written notice to pay the premium.
- If a loss or damage under the policy claims that the insured had no liability, then the insurer may pay to the lender the whole principal sum plus interest whether secured or unsecured.
- If there is other insurance on a property and a loss occurs the insurer will pay to the lender its proportionate share of the coverage.
- The insurer may cancel the policy at any time if it gives the lender 10 days written notice.
- If the policy expires the policy will remain in effect for a period of 10 days after the expiration or until the lender obtains new insurance.
- If legal title to ownership becomes vested in the lender then the insurance shall remain in effect for the term of the policy.
- All notices required to be given to the lender by the insurer will be mailed or delivered to the lender at its office described on the first page of the policy.
If no 438BFU exist, the lender may be disappointed. The mortgage broker who originated the loan or the servicer may be blamed for this over site, and corresponding losses. Consider the following occurrences:
- A Claim arising out of a fire, windstorm, or water.
- Active, reconstruction occurs by a 3rd party contractor.
- Inspections need to be made to verify the adequacy of the work.
- Distributions need to be made from the insurance carrier for the claim to the contractors, borrowers, and or the lender(s).
- Failing to submit a claim in a timely manner.
- Borrower dies, insurer receives notice, and cancels policy.
- Borrower defaults on loan payments.
- Borrower defaults on insurance premium payment.
- Borrower receives notice of cancellation from the insurer, for some reason like potential fire hazards.
- Misrepresentation of borrower to the insurer such as substantial understatement of replacement cost, to save on premium. Lender fails to catch misstatement.
- Borrower, or primary insured Intentionally destroys the insured property for purpose of insurance settlement.
- Committing an act that would void the policy such as insured party intentionally starting a fire for the purpose to getting the insurance proceeds, where the insurer may deny a claim, on behalf of the borrower, but not the lender.
- Recordation of a “notice of substandard condition”. Insurer receives notice and threatens to cancel insurance if not brought into conformance.
- Recordation of a “notice of violation of legal use, or non-conforming use” Insurer receives notice and threatens to cancel if property not brought into conformance.
Rights of the lender in the above occurrences are dramatically different when the necessary documents are not correct. Some of the above are covered by the 438 BFU, and some require additional endorsements. I will write additional articles to cover other aspects of insurance coverage.
A loss payee provision without a specific endorsement is not a separate agreement between the insurance company and the Lender (loss payee). It is merely a notional statement which only reflects one thing: dual payment if an insurable loss occurs which the insurance company agrees to pay.
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This article is intended for educational purposes only and is not a solicitation.