Don’t Close Without This: The Pre-Close Oversight That Could Cost You
By Harbor Group Consulting
The due diligence process is an integral component of the loan transaction lifecycle, reducing uninsured risks for lenders and ensuring regulatory compliance. However, while it is common for third-party consultants to review certificates of insurance, many lenders do not require a full policy review.
In today’s high stakes lending environment, a missed insurance detail at closing can mean millions of dollars in uncovered risk, jeopardizing lenders’ financial health and the long-term sustainability of their operations.
That’s why a pre-close review of the borrower’s insurance policies is one of the most critical steps to understanding how the collateral is insured in any commercial real estate transaction. In this article, we’ll discuss the importance of the due diligence process and how to protect your business from financial loss before finalizing a loan agreement,
Frequently Asked Questions about the Due Diligence Process
Understanding the due diligence process will help your business make strategic decisions that safeguard your collateral and reduce unforeseen issues. Explore these frequently asked questions to stay informed.
What is a pre-close insurance review?
A pre-close insurance review is a comprehensive analysis of the borrower’s insurance policies before the deal is finalized. It ensures that all required coverages, limits and endorsements are in place to protect the lender’s collateral.
At Harbor Group Consulting, our due diligence process includes an analysis of business interruption exposure, catastrophic loss modeling and high hazard exposure analysis (i.e. flood, wind, etc.), protecting your business from hidden liabilities.
Why does pre-close insurance review matter?
Pre-close insurance review is critical to the loan transaction process, offering lenders the following key advantages:
- Catch Hidden Gaps Early: Policies can easily appear compliant based on the review of a certificate of insurance. However, as the certificate of insurance states, “it cannot be relied upon.” Additionally, the certificate does not provide comprehensive coverage detail. For example, there is nowhere on a certificate to note if “storm surge” is included in flood or wind coverage grants. Additionally, if there are multiple buildings covered, the certificate will not provide any insight into potential aggregation issues.
- Speed Up Closing: Delays caused by last-minute insurance issues can derail deals, making it critical to review insurance items upfront. At Harbor Group Consulting, our specialists identify and address issues early on in the process, not when a deal team is near closing.
- Protect the Investment: Without adequate coverage, the lender is at risk if a loss occurs before corrections are made post-close. Our specialists at Habor Group Consulting give you the confidence that the insurance policies are adequate to protect the collateral at the start of the loan. Additionally, we provide a robust platform to track insurance renewals year-over-year.
Completing the due diligence process and a thorough insurance review increases the likelihood of a successful transaction, pushing the lender’s financial goals forward.
What are the benefits of pre-acquisition due diligence for lenders and investment managers?
Effective due diligence provides the following benefits for lenders and investment managers:
- Risk Mitigation: Identify and correct coverage gaps that could affect loan performance.
- Documentation Compliance: Ensure borrower policies align with loan agreement insurance requirements.
- Fewer Surprises Post-Close: Avoid insurance defaults or claim denials that arise after the ink is dry.
- Efficient Closings: Streamline communication between borrowers, brokers and legal teams, allowing deals to close on a timely basis.
Pre-close due diligence enhances credibility and transparency throughout the deal process, allowing lenders to confidently move forward with deals that protect their interests and mitigate potential losses. By working with a consulting firm that specializes in lender risk advisory, lenders will receive the necessary guidance, expertise and support to reduce liabilities and costly errors and remain compliant.
Harbor Group Consulting’s Comprehensive Due Diligence Services
As the leading insurance advisor for commercial lenders, Harbor Group Consulting provides thorough due diligence to successfully navigate clients through the full transaction lifecycle. Our meticulous pre-close insurance review ensures your deals are protected from hidden risks, unexpected delays and costly gaps in coverage. We understand the importance of precision in the deal process and ensure appropriate lender protections are in place, including lender loss payee, additional insured protections or mortgagee clauses.
Contact Harbor Group Consulting today to learn how our specialists can safeguard your transactions and simplify the closing process.
