The short answer
Your collateral is only as good as the insurance on it. The single most important clause is the one that names you as mortgagee under a standard (or union) mortgage clause, which protects you even if the borrower voids their own coverage. Beyond that, flood, earthquake, construction and vacancy risks need specific attention, and the rules differ between Canada and the US.
The mortgage clause: standard versus loss payee
There are two ways a lender can appear on a property policy:
| Clause type | What it does | Risk to lender |
|---|---|---|
| Standard (union) mortgage clause | Creates a separate contract between insurer and mortgagee; lender is paid even if the borrower breached the policy | Low: the lender's coverage survives the borrower's misconduct, subject to clause terms |
| Open or simple loss payee clause | Lender receives proceeds only to the extent the borrower could recover | High: if the borrower's claim fails, so does the lender's |
Canada. Canadian property policies commonly attach the Insurance Bureau of Canada's standard mortgage clause. It generally protects the mortgagee against invalidation of the policy by the owner's acts or neglect, requires notice to the mortgagee before cancellation, and lets the mortgagee pay premiums to keep coverage in force. Quebec's Civil Code also provides for insurance indemnities to benefit hypothecary creditors.
United States. US policies use a standard or union mortgagee clause in the ISO commercial property form or an equivalent endorsement. Confirm the lender is named correctly (including "its successors and assigns" and "ISAOA/ATIMA" language) and that the clause covers notice of cancellation.
Cross-border tip. Use the form customary where the property sits. A Canadian lender insuring a Florida property should accept a US form endorsement, not ask a Florida insurer to attach a Canadian clause.
Flood
United States. The Flood Disaster Protection Act of 1973 (42 U.S.C. § 4012a) requires federally regulated lenders, and loans sold to Fannie Mae and Freddie Mac, to require flood insurance on buildings in FEMA special flood hazard areas. Private non-bank lenders are not directly bound by the mandatory purchase rule, but the risk is the same. Check the FEMA flood zone for every US property and require coverage through the National Flood Insurance Program or a private flood carrier. NFIP building coverage is capped at $250,000 for residential and $500,000 for commercial buildings, so larger loans need excess flood cover.
Canada. Canada does not have a national flood insurance program equivalent to the NFIP. Overland flood coverage is available as an endorsement from many insurers but may be expensive or unavailable in high-risk areas. Lenders should review flood maps and loss history and price the risk.
Earthquake and wildfire
California, coastal British Columbia, Washington and Oregon carry meaningful earthquake risk, and standard property policies generally exclude earthquake. Decide whether to require earthquake cover, which can carry deductibles of 10% or more of insured value, or to reflect the risk in loan-to-value. Wildfire risk has tightened insurance availability in parts of California and BC; confirm a policy is actually bindable before committing.
Construction and renovation
On construction and fix-and-flip loans, require a builder's risk policy covering the full completed value, with the lender named under a mortgage clause. Confirm it covers materials in transit and stored on site, and that it converts or is replaced by a permanent policy at completion. Require the general contractor's commercial general liability coverage with the owner and lender as additional insureds.
Vacancy and REO
Many property policies restrict coverage after a building is vacant for a set period, often 30 or 60 days. Bridge and value-add properties are frequently vacant. Require a vacant property policy or a vacancy permit endorsement. After enforcement, the lender or receiver needs its own coverage immediately, because the borrower's policy may lapse or exclude losses after possession changes.
Monitoring
- Obtain certificates and the actual mortgage clause endorsement, not only a certificate
- Diarize renewal dates and require evidence of renewal 15 to 30 days before expiry
- Reserve the right to force-place insurance at the borrower's cost (US consumer loans must follow 12 C.F.R. § 1024.37)
- Require insurer ratings and admitted carriers where appropriate
- Control insurance proceeds: require that they are paid to the lender and applied to repair or repayment at the lender's option
Frequently asked questions
This content is general information and is not legal or insurance advice. Legal counsel to the Cross-Border Private Lenders Association: Jasmine Daya & Co. Questions: info@cbpla.com · www.cbpla.com
Frequently asked questions
What is a standard mortgage clause?
A clause in a property policy that creates a separate agreement between the insurer and the lender, so the lender is protected even if the borrower's own coverage is voided.
Do private lenders have to require flood insurance in the US?
Private non-bank lenders are not generally bound by the federal mandatory purchase rule, but prudent lenders require flood coverage in flood zones.
Does Canada have government flood insurance?
Canada has no national program equivalent to the US NFIP. Overland flood coverage is sold by private insurers as an endorsement.
What insurance does a construction loan need?
Builder's risk on the completed value, with the lender under a mortgage clause, plus contractor liability coverage naming the lender as additional insured.
This content is general information for industry professionals and is not legal, tax or financial advice. Laws change and apply differently to each transaction; obtain advice from qualified counsel in each relevant jurisdiction. Legal counsel to the Cross-Border Private Lenders Association: Jasmine Daya & Co. Questions: info@cbpla.com