UCC Insurance

Abstract

Beginning about ten years ago, several title insurers in the area of real estate financing began issuing UCC insurance that is designed to protect the interest of lenders who take personal property as collateral. UCC insurance provides both defense coverage (malpractice) and payment on a claim for damages under the circumstances when something has gone wrong in the financing transaction — typically a mistaken opinion by legal counsel that leads to the lender’s security interest either being unperfected (and therefore voidable in the debtor’s bankruptcy) or subordinate to the interest of other creditors. Some of the largest land and title insurers now offer UCC insurance, but the terms of the policies vary substantially. This is due in part because the insurers are regulated by each of the state insurance departments in which they do business, but also because the policies are designed for a variety of different forms of secured lending. Without such coverage, lenders would either have to self-insure or have their law firms assume the risks, which can be monumental in large financing transactions. This paper analyzes UCC insurance and discusses its potential benefits and its weaknesses. The paper discusses UCC insurance in the context of mezzanine financing as well as other potential uses for the product. It also includes discussion of potential value of insurance in guarding against risks posed by Articles 8 and 9 of the Uniform Commercial Code.