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Insurance requirement
Also called insurance covenant, required coverage, evidence of insurance.
A contractual obligation to carry specified coverage naming the lender in a specified capacity, enforceable as a covenant and breachable without ever missing a payment.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Any lender secured by a physical asset requires it to be insured, because the collateral can burn down. The requirement is written as a covenant with three components: what coverage, at what limits, and how the lender is named.
Typical requirements by product
- Equipment finance: all-risk physical damage at replacement cost, with the lender as loss payee on the property coverage and often additional insured on liability. Waiver of subrogation is common
- Commercial real estate: property, flood where the property sits in a designated zone, general liability, and business interruption. The lender is named as mortgagee under a standard mortgage clause
- Asset-based lending: property coverage on inventory and equipment, plus a lender's loss payable endorsement
- SBA: hazard insurance on collateral, and for some loans life insurance on a key owner collaterally assigned to the lender
Ongoing obligations
The covenant is continuous, not a closing condition. It typically requires a stated notice period before cancellation, annual delivery of certificates, and prompt notice of any change. Lapse is an event of default in its own right.
Force placement
If coverage lapses, most agreements permit the lender to buy replacement insurance and add the premium to the balance. Force-placed policies are expensive, protect only the lender's interest rather than yours, and the charge accrues like any other advance under the loan.
Where this one catches people
Loss payee and additional insured are not the same status and are not interchangeable, though certificates get issued with the wrong one constantly. Loss payee entitles the named party to property claim proceeds. Additional insured extends liability coverage to defend that party against third-party claims. An equipment lender that asked for loss payee and received a certificate showing additional insured has no claim on the payout if the machine is destroyed — and that will be discovered after the fire, not before.
Where you will meet this term
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Insurance requirement — common questions
What does insurance requirement mean?
A contractual obligation to carry specified coverage naming the lender in a specified capacity, enforceable as a covenant and breachable without ever missing a payment.
Where does insurance requirement catch people out?
Loss payee and additional insured are not the same status and are not interchangeable, though certificates get issued with the wrong one constantly. Loss payee entitles the named party to property claim proceeds. Additional insured extends liability coverage to defend that party against third-party claims. An equipment lender that asked for loss payee and received a certificate showing additional insured has no claim on the payout if the machine is destroyed — and that will be discovered after the fire, not before.
Is insurance requirement the same as an interest rate?
Insurance requirement is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does insurance requirement apply to?
Term Loan, SBA Loan, Equipment Financing, Asset-Based Lending.
Is there a worked example of insurance requirement?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside insurance requirement?
Collateral, Covenant, Default, Event of default, Key person life insurance.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.