How is your institution protected against uninsured losses to your equipment portfolio? If you’re tracking customer insurance on these types of loans—and spending a lot of time doing it—there’s a solution available that eliminates all tracking and force-placing of expensive premiums altogether. It’s called a Blanket Equipment policy.
I’m sure many of you are aware of another blanket policy that’s designed to cover titled portfolios, commonly known as VSI (Vendor’s Single Interest) or LSI (Lender’s Single Interest), but its primary objective is to cover uninsured losses on autos, boats and smaller UCC collateral—not for farm equipment, semis, dump trucks, and other business equipment loans. These exposures typically require much higher coverage amounts that aren’t offered on a VSI policy. While uninsured losses are somewhat rare on equipment loans, when they happen, it can cause a significant hit to the bank’s bottom line—much more difficult to overcome than a loss on a car or motorcycle loan, which is already accounted for when budgets are prepared each year.
Another difference between a VSI policy and a Blanket Equipment policy is how premium is normally charged by the insurance company. In most states, the VSI premium is passed on to the borrower at the time of origination as a one-time line-item cost. The Blanket Equipment premium is usually charged monthly by the carrier based on outstanding receivables in that portfolio. Since there can be large fluctuations in the equipment portfolio due to payoffs and new originations, basing the premium on monthly balance creates a more logical risk assessment than charging it per loan. Most lenders, however, still recoup the premium through increasing allowable charges, such as origination or application fees.
Standard coverage offered on a Blanket Equipment Policy includes physical damage and theft of the uninsured collateral. It is also considered “single interest” like the VSI policy, meaning the institution is the policyholder, not your customer, and your ability to collect the loan has been impaired.
Consider the following when determining if this type of policy would be a good fit at your bank:
- Are you comfortable with current insurance tracking processes within your institution for the complex loans that could have multiple collaterals pledge, i.e. blanket UCC exposures? Even if you have the most diligent people in your organization charged with tracking, there is a risk of uninsured loans you don’t know about.
- Does your institution have enough equipment exposure to warrant this type of policy?
- Can you identify the balance needing coverage each month based on the way loans are coded, even if cross-collateralized with real estate?
- Are your people spending a lot of time tracking insurance when they could be contributing to the bank’s success in better ways?
Blanket Equipment policies can be a cost-effective way to mitigate the risk of an uninsured loss in these challenging portfolios that are vital to the community.