When Note Investors Must Carry Insurance: Protecting Your Position
When Note Investors Must Carry Insurance: Protecting Your Position
As a note investor, you may not hold the deed — but that doesn't mean you're off the hook when it comes to insurance. Understanding when you have an insurable interest in a property, and when coverage becomes not just smart but necessary, is essential to protecting your investment.
What Is an Insurable Interest?
An insurable interest exists any time you stand to suffer a financial loss if a property is damaged or destroyed. This could be if you own it outright, have a contract on it, or hold a note. Holding a note means you are lending on the property, so you want to make sure that the property is insured the moment you hold a lien against a real asset. If that property burns to the ground, your collateral disappears with it. Courts and insurers recognize this exposure — and so should you. There is a serious business around insuring notes and loans. Ask any insurance agent how much time they spend sending documents to lenders — literally hours a day.
Seller-Financed Notes and Private Lending
Just because you hold the note, and not Wells Fargo, Chase, or BofA, doesn't mean you shouldn't make sure it's insured. Any time you originate or purchase a performing or non-performing note secured by real property, your loan documents should require the borrower to maintain hazard insurance with you listed as an additional insured or loss payee. It is your right and responsibility to do so. Like a big bank, you will want to be listed as the mortgagee or loss payee. In practice, this means a couple of things:
You will get notified of insurance activity — changes, payments, and more importantly, non-payments and cancellations.
If there is a claim, you will likely have to sign the check sent by the insurance company before the owner can cash it. This allows you to be part of the process in the event of a claim, to ensure your interest is protected and to make sure the owner doesn't walk away with the money.
If the policy lapses, your right to force-place coverage and add the cost to the loan balance should be spelled out in the note and deed of trust.
Foreclosure
Once you initiate foreclosure proceedings, your exposure to the property increases significantly. During the foreclosure period, the borrower has little incentive to maintain insurance — or the property itself. As the foreclosing party, you should immediately place a force-placed insurance policy to cover the asset from the moment default begins. Once the property reverts to you through a trustee's sale or deed-in-lieu, you become the owner of record and must carry a standard property owner's policy.
The Bottom Line
Wherever there's a note, there's collateral — and wherever there's collateral, there's a risk you cannot afford to ignore. Insurable interest isn't just a legal concept; it's your safety net. Build insurance requirements into every deal structure, monitor compliance annually, and don't wait for a disaster to discover your position was unprotected.
For questions about insurance coverage for your notes and real estate investments, contact Derek Kartchner of Gila Insurance Group. Derek specializes in helping investors and real estate professionals protect their positions with the right coverage.
Gila Insurance Group LLC - Derek Kartchner - 928-428-6440 - [email protected]