When doing a loan on a equipment or machinery for a business and we file the UCC. If are doing the loan only on the machinery or equipment, am I correct in assuming that we do not need to require flood insurance?


If we add a twist. We originally did the loan for the building, did require flood insurance. Now doing the equipment loan, would that then trigger flood insurance for the amount of the equipment?

I am thinking No in both cases.

From page 31 of the 2007 Flood Guide:

(9) Personal Property
Flood insurance coverage for contents is not
required by law unless personal property, in
addition to a building, secures the loan.

When a commercial loan on a building includes
inventory and other trade or business
movable property as security for a loan, that
property must be covered by a separate
policy under the General Property form.

On the other hand, flood insurance is not
required for a loan financing inventory
where the secured collateral is stored in a
building located in an SFHA and the
building is not security for the loan. Lenders
are encouraged to advise borrowers to
discuss their contents coverage needs with
their agents. Obtaining contents coverage for
personal property or inventory located in
high flood risk areas is prudent, even when
not mandated by law.

I agree, no flood insurance in either case. In the first scenario, you must have a loan secured by RE located in a SFHA before contents insurance is triggered. No RE lien, no contents insurance (and no flood determination) even if the building is in fact in a SFHA.

In the second scenario, a stand-alone equipment loan or similar facility (operating line, etc.) does not trigger contents insurance even if you have a separate lien on the RE. In order for contents insurance to be triggered, you have to have one lien (or simultaneous liens such as a blanket UCC filing, etc.) securing both the RE and the equipment together. It's the second scenario that always freaks out commercial lenders because they're afraid they have to go back and check any RE loans for flood every time they do a stand-alone equipment loan, etc.

The real trick is calculating the amount of contents insurance required when it is triggered.

Good luck.

Agreed - however safety and soundness considerations might be worth considering depending on the stength of the borrower.