Would you ever purchase a used car from a stranger without bringing it to a trusted mechanic first? You would likely want to know the condition of the brakes, the tires and if the engine and transmission will hold up. Has the car been in an accident? In other words, is the car dependable, will it protect me and my family, and is it worth the purchase price?
This is not unlike the process bank commercial loan officers, credit officers and underwriters go through when they do their due diligence in considering whether or not to green light a loan. They perform an array of reviews and tests to “kick the tires” of the potential borrower to answer questions such as: Is this a dependable company and a good risk? Will the borrower be able to maintain the covenants agreed upon and make the payments to ultimately repay the loan or renew the loan?
When it comes to protecting against the unknown, businesses purchase commercial insurance. Lenders also want to make sure their clients have comprehensive insurance in place to protect the borrower and help them remain a “going concern” should an unexpected event occur that could potentially close their doors.
Too often, up to 98% of the time, lenders depend upon a simple piece of paper to determine if the potential borrower has sufficient insurance in place. They look to the “all-important” Certificate of Insurance. Is there a Certificate of Insurance? OK, check off that box and move on.
Read the top box in just about every Certificate of Insurance and you will see this statement or one very similar:
This evidence of commercial property insurance is issued as a matter of information only and confers no rights upon the additional interest named below. This evidence does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies below. This evidence of insurance does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the additional interest.
But the title at the top of the page clearly states Evidence of Commercial Insurance, doesn’t it? This is a shining example of “the Big Print Giveth and the Small Print Taketh Away.”
Does any Certificate of Insurance with a disclaimer such as the one above offer any real comfort or security to a lender? Which paper is worth more, a piece of soft, comfortable toilet paper or the worthless Certificate of Insurance? The disclaimer makes the Certificate of Insurance all but a waste of paper. Reality is, the lender is better off with toilet paper.
Lenders who rely on the COI for a sense of security that their borrower is insured or properly protected via insurance are gravely mistaken. For example, the COI does not list all the limitations and exclusions found in every insurance policy. Is the lender listed on the policy properly? Only if that is evidenced on the actual policy endorsement.
Just as someone considering buying a used car would hire a trusted mechanic to inspect the vehicle (money well spent), lenders need to partner with a trusted independent insurance consultant to “kick the tires” and look under the hood at the guts of the borrower’s insurance policy to see if the terms and conditions are proper. An independent insurance professional will not look to make a sale or take over an account, but, rather, will ensure the coverage is proper and the lender’s interests are properly represented.
Our recent reviews have uncovered:
- A national food manufacturer with more than $135 million in sales had two property polices, one covering the inventory and the second covering the hard assets, the buildings, machinery and equipment. The inventory policy showed limits for “food spoilage,” but deep in the fine print was an endorsement that deleted food spoilage coverage. Once this was pointed out, the broker had the carrier amend the policy to include full spoilage.
- The same national company did not have a separate cyber liability policy. There was simply a one-page add-on coverage endorsement, the sort of limits one would get as a freebie on a policy for the local bagel store. Upon our recommendation, they purchased a proper Cyber Insurance Policy.
- A local company was in the business of purchasing gasoline in bulk. It would then contract with individual fuel transporters to fill tanker trucks and deliver the product to independent retail gas stations in the tri-state area. The primary company, the borrower, did not have pollution coverage, nor did three of their independent transporters have coverage to protect them in the event of a fuel spill. An accident on the road can easily cause 20,000 gallons of toxic fluid to spill onto the highway and into the sewer system — an EPA nightmare and a massive cleanup cost. Once this was pointed out, the borrower updated its coverage and the transporters either purchased the proper coverage or lost their contract to deliver on behalf of the bank’s borrower. All haulers are now required to have this coverage and need to be approved by the company’s commercial insurance partner.
Remember, Certificates of Insurance are worthless. Do not rely on a document that is not as valuable as toilet paper. Have a professional review the policy and “kick the tires.”
Harvey Topitz is the founder and principal at RI Risk Management Services.