Securing Lender Access to Insurance Proceeds in Bankruptcy

In most financing transactions, particularly project finance transactions, lenders seek to obtain security over all of a borrower’s assets. One crucial asset that sometimes does not get sufficient attention is insurance proceeds. Lenders are accustomed to ensuring access to the borrower’s insurance coverage through “additional insured” or “loss payee” provisions.  In theory, if there is an “occurrence” or event resulting in physical loss or damage to the borrower’s property or even ensuing business interruption losses, the lender, as “additional insured” or “loss payee,” is independently entitled to recover the value of the damaged property or lost profits directly from the insurer as a party to the applicable policy—even if the insured is in bankruptcy.  In practice, this strategy usually works well.  After all, the overriding legal rule dictates that policies and their proceeds are only the property of the bankruptcy estate if the borrower is the beneficiary of such proceeds… Continue Reading