One of the toughest properties for banks to find coverage on these days is vacant foreclosed commercial properties, which have grown in numbers over the last several months and promises to continue to be a problem for the upcoming year.
As the Senior Financial Institutions Underwriter for All Risks, Ltd. I see this day in and day out. A bank has a package policy that has been allowing them to insure their foreclosed properties and now all of a sudden they submit a commercial vacant property and their current policy declines it. This leaves the bank scrambling for coverage and has their insurance representative looking in all of the usual places. The problem is that they will have a hard time finding coverage with the usual list of carriers they would approach.
The underlying issue is the increasing number of foreclosures that are swelling the market. The commercial market has remained, up to this point, relatively unchanged when compared to residential foreclosure rates. With the last few months of 2009 offering an increase and CMBS (Commercial Mortgage Backed Securities) delinquency levels on the rise, we can anticipate a much larger and more rapid increase in 2010. It has become apparent to most experts that the commercial foreclosure curve is really just beginning. When you combine these facts with the small and medium business failure rates and the necessity for management companies to lower rents to keep occupancy, you have the makings of another foreclosure storm, only this time with commercial real estate.
This has lead traditional insurers to shy away from the vacant commercial foreclosure risks all together; leaving banks and lenders on their own to find adequate coverage to protect their interests in the foreclosed property.
So where do they turn? Lender Placed and Foreclosed property insurance programs. These are programs designed by insurers to meet the needs of this risk market head on. The policy is written as a master policy. (A master policy is a one time annual policy that is written to cover the banks entire portfolio as needed. This type of policy should not be confused with blanket coverage. With a master policy the properties still have to be reported to the policy, they just are not individually underwritten.) The reporting is done in many ways but the best and most efficient programs offer a web based reporting tool that lenders can log into 24/7/365 and add and remove properties as needed.
One of the most appreciated benefits of these types of insurance programs is that they offer cash flow management control for the lending institutions. These types of policies offer the convenience of monthly billing for the insured. Monthly billing means that the bank is only paying for insurance that they use, as opposed to the traditional method of paying for an entire year up front for each and every property. This allows a bank to minimize the capital outlay for insuring their portfolio of foreclosed properties.
A lot of aggravation and lost money can be saved at the end of the day , if banks and their insurance representatives were aware of these programs and working with experts who understood the type of risk they are insuring as opposed to trying to make it fit into coverage that was not intended for their needs. All Risks, Ltd. offers one of the most comprehensive and well thought out Lender Placed and Foreclosed (REO) insurance programs on the market today.
Feel free to contact me with any questions or even for a review of your current program to see if there are gaps in coverage that leave you unnecessarily exposed.
Senior Financial Institutions Underwriter