Your insured's bank has asked to be named as an additional insured on their business income coverage. Why? Could be that the insured has a loan or line of credit they want to secure. Could be that they're so used to being named as a mortgagee on the property policy, that this makes sense too?

When a building is purchased on credit, it is common to name the lender as the mortgagee on the commercial property insurance policy. That's usually necessary to secure the loan, and the interest of the mortgagee is normally protected by statute as well as the mortgageholder clause under the policy.

But what if the lender also wants to be named as an additional insured for the owner's business income insurance? If I'm the insurance company, I wouldn't want that. Here's why....

Virtual University faculty member Mike Edwards, recently received the following question: "Our commercial insured bought a building and there is a mortgage on it. The bank, of course, wants to be named as the mortgagee for the property insurance. They also want to be named as a loss payee on the business income policy. The insurance company does not want to do this saying there is 'no insurable interest.' Whatta ya think?"

The VU faculty doesn’t really know why the bank wants this. A best guess is that either they are looking for business income proceeds because they prefer to be able to continue the full mortgage payments (principal AND interest) in lieu of a settlement under the mortgage clause for the principal only, or the insured also has one or more other loans that they're trying to protect. [Note: For more information about the former issue, check out "Are Mortgage Payments Business Income 'Continuing Expenses'?"]

The bank has no insurable interest in the business income under the insured's policy (as one of our readers indicates below, they certainly could have an insurable interested created by the loan agreement...but we believe they should insure that interest under a Mortgage holders E&O or similar policy). Their only interest is in the building and, if that's adequately insured, they'll get their financial interest out of it. The business probably has some loans or lines of credit with the bank as well, and they want to protect an uninsurable (from the perspective of the building owner's coverage) business risk with a piece of the BI.

The company is under no contractual obligation to do that. From the insurer's perspective, a policy mortgage clause exists primarily because state laws mandate it. There is no similar statutory mandate for business loans.

The bank isn't covered if the insured's business fails and he can't pay back the loan, so why should they be explicitly protected if the business burns down? If anything, the insured would have business income coverage to pay for continuing expenses, so the bank is more likely to get their money in the event of a covered loss as opposed to just a business downturn. They should be happy with that or get out of the business...some things are not directly insurable and a business loan is a speculative risk, not a pure risk.

Upon further inquiry, it appears that the insured wants the bank named as a loss payee or additional insured because the loan agreement he signed requires it. Sorry. The insurance contract involves two parties: the insured and the insurance company. Barring some statutory requirement, the insurer has no obligation to either the bank or the insured to comply with this request. If the loan requires they be named as an additional business income insured, the named insured should read his loan agreements better and discuss the insurance implications with his agent BEFORE signing the loan.

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University.

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