Every SBA lender knows that it must act prudently when servicing its loans, especially when it comes to caring for and protecting loan collateral. Therefore, an SBA lender who receives notice that a borrower has allowed its insurance coverage to lapse may naturally assume that the prudent thing to do is to force place insurance and ensure that the insurance coverage that was present at the origination of the loan remains in effect throughout the loan term. The SBA’s rules, however, focus on protecting the SBA’s insurable interests, not the status quo. Consequently, lenders who plan to seek reimbursement from the SBA for costs associated with the forced placement of insurance must first analyze the facts of the particular loan to determine whether the SBA is likely to agree to share those costs.
A lender who is deciding whether to force place insurance should begin by addressing some basic considerations. First, the SBA will rarely share in the cost of liability insurance. Liability insurance is typically not an issue of concern for the SBA because the lender would not be liable for liability claims or judgments against the borrower, and any judgment lien against the borrower will generally be junior to the lender’s properly recorded lien. It is far more common for the SBA to share in the cost of hazard insurance to protect the value of the collateral against the risk of casualty.
Second, the lender should determine whether the value of the collateral exceeds the total amount of senior liens in favor of other creditors. In other words, is the value of the collateral sufficient to allow for a financial recovery by the SBA lender? This question is the first factor in the SBA’s seven factor test, and it’s obviously a key issue. If the property does not have sufficient current value in excess of the value of any prior liens, there is no value in the lien securing the SBA loan and, therefore, there is no insurable interest for the SBA to pay to protect.