Getting Real about UCC Insurance for Real Estate Transactions

Imagine a world where real estate transactions are closed without title insurance. Title insurance has become such a common fixture of real estate transactions that it is difficult to imagine a world without.   We take title insurance for granted, but many of our real estate colleagues from the baby boomer generation can recall a time when it was common to rely on opinions of title prepared by closing attorneys instead of purchasing title insurance policies.   History repeats itself, and we now find ourselves in a similar phase with UCC insurance.  We are more likely to rely on opinions of closing attorneys instead of buying UCC insurance when pledging members interests in entities that own real estate.

Why Title Insurance but not UCC Insurance

Why is title insurance so prevalent in real estate transactions, but UCC insurance is not? A lack of understanding about the benefits of UCC insurance is the primary reason.

History of Title Insurance

According to American Land Title Association (ALTA), the first title insurance company was formed in Philadelphia in 1876 to insure purchasers of real estate and mortgages against losses from defective title, liens and encumbrances with the goal of making transactions more secure and efficient.  The use of title insurance became more widespread after World War II, when returning service members began buying homes in large numbers.  When banks thereafter started requiring loan policies, title insurance policies became ubiquitous in real estate transactions starting more in the western portions of the country before moving eastward.

History of UCC Insurance

Although real estate laws are ancient, the Uniform Commercial Code (UCC) governing commercial transactions is a relatively modern invention, and UCC insurance even more so.  According to First American, it was the architect of the first UCC insurance policy (the Eagle 9 Lender’s policy) in 2001.  Now every major title insurance company offers a UCC insurance product. But, being only 23 years in, many practitioners in the real estate community are not fully familiar with the benefits of UCC insurance.  Pledges of membership interests are routinely accepted without requiring UCC insurance.  This creates a significant and avoidable gap in insurance protection for real estate transactions.

UCC Insurance Benefits

The primary benefits of UCC insurance are:

1. Insuring the attachment, perfection and priority of the secured party’s security interest in personal property collateral.
2. Protecting a lender from mis-indexed UCCs and fraudulently filed terminations and amendments.
3. Covering transfers to the successor and assigns of the insured.
4. The policy applies to all types of Article 9 collateral under the UCC.

Facilitating the Closing

Furthermore, just as real estate practitioners enjoy multiple sets of eyes reviewing mortgages and legal descriptions in real estate transactions, a UCC insurance policy provides another set of eyes to review the collateral descriptions in security agreements and the UCC-1 and to review the precise legal names of the entities for the UCC filing.  Finally, UCC insurance covers the gap period between funding and the filing of the UCC to perfect the security interest.

Conclusion

We believe if more practitioners understood the benefits of UCC insurance, more would recommend its purchase to clients.   Of course, UCC insurance is no substitute for good lawyering but is a useful tool for any real estate transaction involving the financing of membership interests.  UCC insurance removes the avoidable insurance gap in financing such transactions.  Perhaps 20 years from now, we will struggle to imagine a world where the transfer of membership interests were financed without UCC insurance.  Finally, despite its usefulness, UCC insurance is not for the uninitiated lender.  Unlike title insurance policies, UCC policies are not uniform across the industry. Exceptions and coverages differ among insurance providers. It is critically important to work with an experienced and trustworthy finance lawyer to help ensure optimal coverage is obtained.  Given our familiarity and extensive experience with this subject area Sherin and Lodgen is ideally suited to negotiate UCC policies and help clients avoid common  pitfalls in mezzanine and real estate transactions.