Insurance Issues in Financing Transactions

Summary

In secured financing transactions, borrowers pledge their assets as collateral and lenders rely on that collateral for assurance that their borrowers will have the ability to repay the loans when due. Lenders rely both on the value of the collateral and on the income stream generated by the operation of the pledged assets (i.e., borrowers’ property, plant and equipment), so anything that negatively affects a borrower’s property or business creates risk that it will be unable to repay its loans. To protect a borrower’s property and business (as well as the collateral value of such property), lenders often require borrowers to enter into insurance policies and maintain a negotiated level of insurance coverage.