Make sure you have the correct insurance processes and operations in place, so you and your borrowers are fully protected in the wake of a catastrophic event.

Let’s face it—insurance is often one of the last items many lenders verify before closing a loan. As a lender, you can take several steps to streamline your insurance process on the front and back ends of the life of a loan.

Let’s take a look at a few that will make a difference in how fast you can close loans and better protect you and your borrowers.

Determine Your Insurance Requirements

Although the focus here is not on insurance requirements, understanding what they are can make things run much more smoothly for you and your borrowers.

The types of loans you offer should dictate the type of coverage you require. For example, if you are a residential fix-and-flip lender, it is recommended that you require any renovation project to carry builders risk insurance. For a long-term loan, this coverage may not be required.

If you aren’t sure whether your insurance requirements are adequate or whether they should be reviewed, there are companies that can assist you. They’ll help ensure that what you’re asking your borrowers to insure isn’t onerous and is also not putting you at a competitive disadvantage against other lenders in your market.

If you are lending in multiple states, make sure your insurance requirements are compliant with state laws and statutes.

Finally, if you are lending on multifamily or non-residential assets, there can be a host of additional coverages to consider. What is required for a residential loan may not be required for a commercial property and vice versa.

Flood

Determine the flood zone for each property you are lending on. Every property in the U.S. is mapped into a flood zone. Properties in a zone containing the letters “A” or “V” are in a flood zone where there is at least a 1-in-100-year chance of a flood occurring.

Federally backed loans will require that collateral located in a 1-in-100-year flood zone must maintain a separate flood insurance policy. Most properties in the U.S. are in the “X” flood zone; however, just because a property is not located in a flood plain does not mean there is no risk of a flood loss.

Find a reliable source to help you determine flood zones. Companies like Service Link and CoreLogic have programs you can affordably access. You can also search for an address through fema.gov, and the appraisal process will also typically uncover the flood zone.

Preferred Insurance Broker

You may have a preferred insurance provider you enjoy working with. If not, create a process with an insurance broker that can provide your borrowers with a compliant, competitively priced policy.

It is important to have a broker that is licensed in all states in which you are lending so they can provide a policy specific to each state. By creating an upfront process that allows your insurance broker to quote coverage for all your deals, you can also use their quote to price your loan.

Additionally, if you’re ready to fund and you’re having insurance compliance issues, you have a go-to resource to get coverage placed and your deal funded.

Finally, if you run into any insurance questions you can’t answer, most insurance brokers will gladly be your resource for those answers in exchange for the business you refer them.

Compliance Review

One of the most important steps in your insurance process is compliance review. The type(s) of loans you offer can determine your internal insurance review process.

Most lenders will handle initial review of single-asset loans by training their staff to review insurance declaration pages or certificates. Equip your staff with enough insurance knowledge to be able to read and comprehend the various forms they will receive from insurers.

Each insurance company or broker your borrowers deal with may have their own language or formats for sending you information to review. It’s important to understand there are many different terms used in insurance that may mean the same thing, so empowering your staff to review and accept or decline coverage is key to compliance.

The complexity of the loan may also dictate how you may most efficiently review coverage. A portfolio loan of multiple properties all secured by a single loan can present unique insurance policy structure.

Mark Thomas, vice president of credit implementation and underwriting for Finance of America Commercial, says that for portfolio loans, the company uses a third party to review coverage and provide outside quality control.

“Our third-party vendor reviews insurance and communicates all changes and concerns directly with the insurance provider,” he said. “Once our third-party vendor has approved, then the insurance is approved for the loan. A diligence review will then be completed by our QC Team prior to closing.  We outsource the insurance review, given the complexity of the insurance policies—master policies, multiple properties, multi-family properties, etc.”

Indeed, there are several providers that will review insurance for your complex deals.

Tracking

It is also important to have a system for tracking insurance once the loan has closed. Many lenders use loan servicing companies to handle ongoing loan administration, including insurance. Although this is the preferred way to handle insurance compliance, what if you’d like to keep these services in-house?

In that situation, creating good processes for reviewing the various insurance documents you receive is critical. Correspondence you may receive from an insurer include renewal notices, billing statements, and cancellation notices. Develop procedures for how you will handle these important dates and notices. If you are equipped to require escrows for your insurance premiums, it is highly recommended that you do so in order to eliminate any cancellation notices for non-payment of premiums.

Additionally, an outside servicer will typically handle legal notices and keep you in compliance with various state and federal requirements.

Force-Placed and REO Coverage

In the unfortunate event you cannot verify adequate insurance coverage, it is vital to have the ability to force-place coverage on your borrower. Pricing and product availability will vary, depending on the volume of loans you write. If you have to foreclose, then you will need REO coverage.

If your loans are serviced by a third party, the servicer can typically provide both of these types of policies. However, if you do not use a servicer, or if your servicer cannot handle this need, then go ahead and set up a policy that is able to accept these risks.

Binding Restrictions

During widespread loss events like a hurricane, flood, or wildfire, it is not uncommon for an insurance company to impose binding restrictions for several days before the event through several days after the event may have passed.

For example, hurricane season for the Atlantic region runs from June 1 to Nov. 30, and often insurance companies will restrict the ability to bind or purchase coverage when a storm has formed and may target a certain area. Due to the volume of storms and unpredictable nature of where landfall may occur, all insurers will protect their interests by suspending the ability to purchase new coverage or change (endorse) existing coverage until the event has passed.

If you lend in any area that may be prone to natural disaster, it is important to understand that your loan funding may be delayed due to the inability to place insurance coverage. Often, these restrictions may extend to adjacent states that are very far inland but can still incur damage from the remnants of a storm or event.

Claims

If your borrower has an insurance claim, be sure you have a procedure in place to protect your interests. You should be properly listed on the insurance policy so in the event of a claim, both you and the borrower are the payee on any claims check. This will allow you to endorse the check so that proper repairs can be made. In the event of a total loss, you can also ensure the proceeds are used to pay off your loan.

All the above practices should allow you to create more security around insurance and your borrowers. The goal is to create a system that is understandable and logical for both you and your borrowers, while protecting your interests as fully as possible.