Named Peril or Limited coverage insures only against specific perils such as fire and windstorm. If you have this type of policy, and have a loss from some other cause, you are not covered by the policy. This is the least expensive type of policy, because the coverage is so limited. Lenders should ensure the borrower can accept this risk, or should insist on broader coverage.

Broad Form coverage is a form of "named peril" coverage, but adds a number of additional possible perils to the list of items covered. 

Typical additions are: 

• Breakage of glass, 
• Damage caused by falling objects, 
• Damage caused by falling water (other than flood), and 
• Building collapse (other than caused by a flood or mudslide).

All Risk coverage covers damage from any source except certain named exclusions. This is broader and more comprehensive coverage, but it is more expensive than a limited policy. 

The exclusions from coverage that are generally named, and thus still not insured are: 

• Nuclear catastrophe, 
• Acts of war, 
• Termite damage,
• Wear and tear, and 
• Civil insurrection. 

Note: Flood damage is still excluded.

The broadest, but also the most expensive coverage, difference in conditions coverage insures against almost anything which changes the conditions of the property adversely (except flood damage and nuclear explosions) and provides for restoration to the original condition.

GAP coverage (a/k/a Debt Cancellation Insurance) this insurance would protect a borrower who finances 100% or more (by adding Accident and Health [A&H] or extended warranty coverage to the purchase price or trading in a vehicle which is upside-down) of the cost of a vehicle and then totals it at any time when the settlement from the insurance company is less than the loan balance. If not covered by a GAP policy, the borrower in such a situation would have a deficiency balance due to the bank. This is a product we should offer whenever it is suitable (for example: any borrower that could be "upside-down" in the loan at any point and that cannot readily cover the risk from other resources).

Builder's Risk coverage this type of insurance covers buildings while they are under construction, and the premium is reduced in comparison to "permanent policies", since the exposure to the insurance carrier should be less. Coverage starts when the building is started, and terminates when a Certificate of Occupancy (CO) is issued, there is occupancy, or the building is sold; unless the policy is endorsed to provide permanent coverage.

Reporting Form a/k/a Contractor's Automatic Form:

In addition to having a policy for the full amount issued when construction starts, builder's risk policies can be written on a Reporting Form, a/k/a Contractors Automatic Form. With this type of policy, the contractor reports completion on a monthly basis and coverage is valid only for the amount reported as complete. There is added risk to the contractor and to the Bank, if the contractor does not report accurately (for example: they may choose to understate the percentage of completion, so as to reduce the cost of insurance), so we should be highly selective about the contractors we allow to provide this type of policy. We should also periodically verify the percentage of completion reported to the insurance company and compare it to the degree of completion shown on the contractor's draw requests.

A H06 Condo insurance policy bridges the gap in coverage between the condo association’s master insurance policy and property/personal liability protection. Every condominium development should have a master insurance policy that covers items such as the physical building and all of the common area (for example: pools, gyms, or lobbies) and provides worker compensation for those employed by the condo association. However, these master insurance policies typically stop coverage at the 4 exterior walls of the condo unit. It is important to note that master insurance policies DO NOT protect personal contents not insured by the master association policy and any of the items within the 4 walls of the condo unit, such as cabinets, appliances, flooring, or jetted tubs.

A homeowner’s policy must include wind coverage. Many homeowners have excluded the coverage to bring down the premium amount. Certain insurance companies exclude wind coverage as a matter of business. Should the homeowner’s policy exclude wind insurance, a separate policy for wind coverage must be purchased. The deductible for wind insurance may be up to 5% of the asset value.

Although it is not well known, Florida is part of an active fault line. This kind of damage is not covered by most policies, but is something that should be considered for very large loans.

Florida has the most sinkholes in the nation. Hazard insurance typically does not cover loss due to sinkholes. Recently, all insurance companies have been required to include catastrophic ground cover collapse, but it may also exclude sinkhole coverage. Though we do not require sinkhole coverage* as a condition to the loan, all insurance companies must offer it. If there has been prior damage by sinkhole to proposed collateral, the bank shall require an inspection and certificate of insurability from the insurance company.

*Ground Coverage Collapse coverage (not the same as sinkhole coverage)

Florida defines catastrophic ground coverage collapse as geological activity that results in the following:

• The abrupt collapse of the ground cover;
• A depression in the ground cover clearly visible to the naked eye;
• Structural damage to the building, including the foundation; and
• The insured structure being condemned and ordered to be vacated by the governmental agency authorized by law to issue such an order for that structure.

Some large companies that are borrowers are willing to assume the risk of hazard losses, and want to self-insure. These companies may feel that the known loss of the premiums is so great for multiple properties and locations that they are better off to take the risk of non-insurance if they have many properties to spread the risk over. Some states will self-insure their own buildings on the same premise. Self-insurance has safety and soundness considerations, but there is no regulatory requirement preventing it, when warranted. We should not let a company be a self-insurer unless their financial capacity is so strong that we would make the loan unsecured and the collateral is taken only in an abundance of caution, AND they have a large number of properties to spread the risk over. Regardless of financial capacity, we should never let an individual (as opposed to a large and solvent company) be self- insured because we risk a lawsuit for negligence if they ever sustain a loss (which may mean that we have assumed liability and are liable for any loss they might incur). Despite this admonition, and our policy to the contrary, if we ever do allow an individual to self-insure, we should require them to give us an estoppel letter holding us harmless for any loss they might sustain. 

Remember, unlike hazard insurance, no one can self-insure for flood insurance, except a state government!

On installment loans, our note, which serves as our contract with our borrower, requires the borrower to carry insurance on collateral (such as a vehicle) and to furnish us with evidence of such coverage.

To secure the banks interest we have purchased a blanket policy to cover our auto loans in the cases where a client has failed to renew their auto policy. The policy covers only the bank’s interest.

Claims to this policy must go through the Collections department.

This approach is to take the original cost of the improvements when new and to subtract accumulated "depreciation," to arrive at the valuation of a loss to be paid by the insurer. In a sense, this coverage "penalizes" the owner for "wear and tear" and does not reward them with "better" conditions after a loss by replacing the damaged items with new items. We should not accept this kind of coverage since it will likely not pay an amount adequate to replace any damaged property due to the depreciation that has accrued to that property and the inflation in cost of building materials and labor. This is also known or sometimes described as a cash equivalent basis.

Note: Most vehicles are covered in this way, and there is probably not much we can do about it other than to try and sell GAP insurance to make up for any possible loss. These policies subject the bank and the owner to a degree of risk. All VSI policies use an ACV basis.

This type of policy is based on the concept of replacing damaged components with new ones, and does not penalize the owner for wear and tear that have occurred; in other words, this approach recognizes that used (depreciated) components can be just as functional to the owner as new ones. Replacement value policies provide more coverage than ACV policies, but are also more expensive.

Homeowner policies are almost always based on replacement cost, rather than an ACV basis, but they may or may not have an "inflation guard" feature. Without some sort of inflation protection, real estate can become underinsured through the passage of time, as replacement costs increase.

Co-insurance is a defense against payment of claims. It applies to commercial buildings, but not to typical homeowner policies. It is a defense that is available to insurance companies when a loss is sustained on property that is under-insured, and it has the effect of requiring property owners to carry a reasonable amount of insurance on their property, and pay the resultant premiums. In effect, the co-insurance defense says that the owner must carry coverage for not less than a given percentage (from 80% to 100%, as stated in the policy) of the replacement cost of the structure, or the owner will share ANY loss pro rata with the insurance company, as a partial self-insurer. If co-insurance requirements are not met (if the owner does not carry the required percent of coverage), the owner will suffer an uninsured portion of any loss, in addition to the amount of the deductible. We do not want to be in a position where we are subject to this defense! Accordingly, it is our policy that we will always read the policy and its co-insurance clause, and require the borrower (property owner) to carry the stipulated minimum percentage of coverage. It is thus never acceptable for us to stipulate in a commitment letter merely that the property must be insured for an amount greater than our loan amount; and we should instead stipulate that the owner must carry insurance in an amount sufficient to prevent the defense of co- insurance (which is typically an amount greater than our loan amount, unless our LTVR is greater than 80%).

A binder is a commitment by an authorized agent to issue a written policy at some later date, after certain events have occurred. If those events do not occur, the policy will not be issued, and there will be no coverage. We are always at some risk with a binder, since the requirements for issue of the policy may never be met. Lender should always follow up to be sure we receive evidence of the actual policy within a very limited time.

An insurance company may issue a certificate to evidence the coverage they are providing on a particular property. A request should be sent to the insurance agent for any loan secured by collateral. This request for a certificate of coverage must also include the request to add Capital City Bank as mortgagee and loss payee.

The certificate, or declarations page, should include evidence that the mortgagee or loss payee clause has been added to the policy. Until such evidence is documented, Capital City Bank should not be considered as covered under the mortgagee or lender provisions of the policy.

Why Standard Mortgagee Clause?

When lending on the security of real property, we should always be named as the mortgagee in a standard mortgagee clause, rather than being named as "loss payee." There are valuable rights afforded to the mortgagee that are not available to a loss payee, including:  

• The right to advance notice of any cancellation or non-renewal;
• The right to pay the premium and prevent a lapse in coverage; and
• Not having coverage impaired by acts of the mortgagor (such as fraud, arson, concealment of facts or misrepresentation, or failure to comply with conditions imposed by the insurance company). 

If we are only named as loss payee on real estate, our protection is only that IF a check is issued, it will be issued jointly to us and the owner. A loss payee clause is normally used and should only be acceptable when we have no real property as collateral; (for example: we have a security interest in the contents of a building, such as equipment or inventory, but not a lien upon the building itself). A loss payee clause is also applicable to vehicle loans, which are also not secured by real property. The lender shall have evidence in hand, prior to disbursing loan proceeds, an insurance policy which includes the addition of the mortgagee and loan number assigned.

CCB has an errors and omissions (E&O) policy, purchased from an insurance company, that provides a measure of protection in the event that we fail to take some required action. This E&O coverage is only valid if we have formal policies and procedures in place that are reasonably designed to ensure that said policy and procedures are followed. E&O coverage is not a form of non-filing insurance, and it does not allow us to be casual about normal insurance coverage requirements.

All hazard insurance payments are subject to deductible amounts. The owner must suffer a certain amount of loss before they can call on the insurance company. For real property, deductibles may be up to a maximum of $5,000 (or $2,500 for mobile homes) and up to 5% of asset value for wind, with smaller amounts for fires or other types of risks.

Capital City Bank’s maximum allowed deductibles will be set at:

• $500.00 for car insurance
• $5,000.00 for structure
• $2,500.00 for mobile homes
• 5% of the covered amount of the structure for wind policies

Although flood insurance is a separate topic, please be advised that the CCB policy on flood insurance states that the borrower must take the smallest available deductible. Borrowers cannot elect to take a higher deductible amount on flood policies, unless approved by an Executive Vice President or Credit Administration.

Insurance policies are not all alike, and do not all provide the same coverage. The only way to know what a particular policy covers, is to read the policy and see what the exclusions (things that are not covered) are; to see what the limits of coverage for various types of losses might be, including the co-insurance limits; and to confirm who the named insured, mortgagee, and/or loss payee are.

All insurance companies were not created equal, and some insurance companies sustained large losses in their loan and investment portfolios during the real estate crunch of the late 1980's; potentially making them unable to pay claims. If we are offered a policy written by a company we are not familiar with, we should check their financial capacity in the A.M. Best's Insurance Guide or using Demotech. This is clearly more important for larger loans, but should be considered for all real estate loans.

Applicable federal and state laws always have priority over the language in any given insurance policy. 

• In Florida, state law provides that for a "total loss" to a structure, the insurance company has the option to pay the face amount of the insurance policy, OR to rebuild the structure. This is intended to deprive the owner of the financial incentive to over-insure an old or vacant building and then burn it down, before the insurer realizes that it is over-insured relative to current value. 
• In Georgia, the law does not conclusively define “total or whole loss”, however an insurer may use various methods to determine whether a structure is a whole loss, even if the structure is still standing. Guidance from case law is similar to Florida in the manner of settling a claim for damaged structures.