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January 18, 2017

Best Practices: “Other” Business Insurance

by Jennifer Borra

Lenders participating in SBA lending programs are required to obtain evidence of hazard insurance, including flood insurance, if applicable, on any real or personal property collateral securing its loans. Most lenders also obtain evidence of general liability insurance and worker’s compensation insurance as a matter of prudent lending. Every small business is unique and there are many types of insurance available to minimize risk of loss. Lenders should take care in analyzing such risks and setting forth the insurance requirements for each of its small business applicants. SBA specifically requires that lenders “must include any other insurance appropriate to the loan”. See SOP 50 10 5 (I) Chapter 5, Section II, Paragraph E, page 174.

Several other types of insurance lenders may consider when underwriting their loans:

  • Automobile Insurance: Is the small business applicant primarily engaged in a business where operating a motor vehicle is mandatory for business operations? Lenders should obtain evidence of automobile insurance that specifically covers any and all borrowers (i.e. EPC and OC).
  • Professional Liability Insurance: Is the small business applicant primarily engaged in providing services, for which an errors and omissions policy would be beneficial? Lenders should obtain evidence of such insurance and be sure it lists the borrower and/or principal as insured (i.e. medical/dental/legal/accounting, etc.).Product Liability Insurance: Is the small business applicant primarily engaged in the manufacture, wholesale, or distribution and retail of a product? Lenders should examine the type of manufacturer/retailer the small business applicant is and the potential risk of such a claim having an adverse affect on the business’ operations and viability.
  • Liquor Liability Insurance: Is the small business applicant primarily engaged in the distribution/retail/production of alcohol? Does the state require liquor liability or dram shop insurance? Lenders should investigate the state law requirements for any applicant involved with the sale of alcohol to determine whether an expanded liability insurance policy is required.
  • Disability Insurance or Business Income/Interruption Insurance: Is it prudent to request that your small business applicant insure against loss due to a disability of the principal or a key employee or an insurable event that prevents the business from operating?
  • Home Based Business/Homeowner’s Insurance: Is the small business applicant operating its business from home? Lenders should determine the collateral for the loan and assess any gaps in coverage that may necessitate obtaining additional insurance to protect and preserve business collateral not covered by a homeowners policy.

The amount and type of insurance required for each loan is a matter of credit policy for each lender. However, it is prudent to require additional insurance when the industry mandates it (i.e. malpractice for a professional services business) or the nature of the business demands it (i.e. automobile insurance for a landscaping or trucking company). The goal in requiring additional insurance is to better protect the collateral for the loan and the continued operations of the small business applicant in the event of an insurable loss that might otherwise result in the business failure, and potentially jeopardize the SBA guaranty.

For more information on insurance requirements, please contact Jen at 267.470.1206 or at jborra@starfieldsmith.com.