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.
