Property and liability insurance are important and often required in various real estate transactions. In a lease, for example, a landlord will make sure that there is an insurance provision with coverage adequate to protect its property. In a purchase and sale of real estate, purchasers will often want to make sure that a seller maintains its insurance coverage so that, if there is any damage to the property before closing, the property can be restored to its original state at the time the contract to purchase the property was signed, and the sale can proceed as planned. Alternatively, a seller may require a purchaser to obtain insurance coverage before the purchaser enters onto the seller's property for the purchaser to perform its due diligence to ensure that, in the event the purchaser damages the property in any way, the damage can be adequately repaired.
Why are insurance policies important?
Insurance policies allow the policy holder, the individual or entity being insured, to shift its financial risk onto a third-party insurance company. By paying an insurance company a small premium, the insured can use the money that may have otherwise been tied up as a safety net for certain scenarios for other investments. For example, if a purchaser wants to enter onto a seller's property to perform due diligence, the purchaser would be doing so at his own risk. If something were to go wrong and the purchaser would damage the property, the purchaser would be required to repair the property or reimburse the seller for whatever damage was caused. To protect itself in such a situation, and if there were no insurance companies, it would be prudent for the purchaser to stash an adequate sum of money just in case something goes wrong. With an insurance policy in place, the purchase can take the sum of money he would've kept as a security blanket and use it to enter a new business deal.
Why do lenders require insurance policies?
Another real estate transaction that involves insurance policies is mortgage loans. One of the requirements that a borrower needs to satisfy to obtain a mortgage loan is insurance coverage. A lender will require a borrower to obtain property insurance in an amount sufficient to cover the worth of the property that the lender will be placing a mortgage on so that, if the property is destroyed, the insurance company can make the lender whole by paying the lender the worth of the property. For the lender to be entitled to receive an insurance payout, if necessary, the lender must be named as an “additional insured.” What is an additional insured? An additional insured is a third-party beneficiary to an insurance policy. In the case outlined above, the borrower of the loan will pay for the insurance policy and have the insurance company add the lender as an additional insured to ensure the lender would be entitled to receive any paid-out insurance proceeds.
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