Watch Out: Some Banks May Try to Overreach at Closings

Attorney Theresa Racht says it has happened enough at recent closings for her to take notice. "More than one lender's counsel [has] asked me to deliver at closing a certificate of insurance naming the bank and its successors and/or assignees as additional insureds on the co-op's insurance," she reports.

Although condos often give banks additional insured status on the condo's master insurance, the situation isn't the same for co-ops. Because the unit-owner and the condo have a responsibility to rebuild the unit after a casualty loss, the lender’s interest in the unit needs to be protected in case the unit-owner and the condo fail to rebuild. In that case, the lender must protect its collateral and take on the rebuilding itself, explains Racht. "In a cooperative, however, the co-op corporation has the obligation to rebuild, not the individual unit-owners. The co-op shareholder is only responsible for the furniture, furnishings, built-ins, paint, tiles, carpet, [and] appliances — essentially all those things described as 'personality' in the contract of sale. The shareholder is not responsible for rebuilding, thus his lender has no interest to be protected."

Furthermore, lenders in co-op transfers are not entitled to be added as an additional insured or certificate holder or anything else, says Racht: "No way should a shareholder's bank, which has made a personal loan to a shareholder secured by the shares, have any claim on any insurance claims or payouts from the co-op's master insurance."

Granting additional insured status to a bank tells the insurance company that there is a business relationship between the co-op and the bank that entitles the bank to certain protections and indemnifications, asserts Racht. This is not the case. A loan to a shareholder is a personal loan whose collateral includes the shareholder's shares of stock in the co-op and interest in the proprietary lease. The relationship between the bank and the co-op is limited to that described in the recognition agreement.

Don't Open Up a Pandora's Box 

Adding a shareholder's bank as additional insured opens the door for that bank to make claims and intervene in the business of the co-op with its insurance carrier.

"Say you have a co-op that has had a bad fire," Racht says. "Ultimately, a payment is received from co-op insurance co-payable to the co-op and the co-op's underlying fee mortgage holder. If a shareholder's lender also is named as an additional insured, that lender may also be co-payable on the insurance payout to the co-op and would therefore have an equal voice with the co-op's underlying lender as to how that money is spent by the co-op. That's not a right the shareholder's lender should have."

Racht advises boards to check with their transfer agents — the manager or attorney — and be certain that if this request is being made, it is just as quickly being shot down. Says Racht: "This is an unfortunate new trend. This request is so wrong on so many levels — it should not under any circumstances be allowed to become the norm."