Insurance Covenants in Corporate Credit Agreements

32 Pages Posted: 11 Feb 2018

See all articles by Greg Nini

Greg Nini

Drexel University - Department of Finance

Date Written: January 31, 2018

Abstract

In a large sample of private credit agreements of publicly-traded firms, nearly all agreements contain at least a boilerplate provision requiring the borrower to purchase insurance. In about 80 percent of the agreements, the insurance covenant is more explicit. Four additional features of the insurance covenant are quite common: requirements of coverage for specific risks, naming the lender as a loss payee, mandating that any insurance proceeds be used to repay the loan, and explicit permission for the borrower to self-insure. Credit agreements contain more stringent insurance requirements for borrowers that pose higher credit risk. The insurance requirements are strongly positively correlated with the loan being secured by collateral, which suggests that insurance creates value by protecting lenders from unexpected changes in seniority that might happen following the destruction of collateral. Insurance covenants are an important ingredient of credit agreements designed to create a very safe claim for senior, secured lenders.

Keywords: corporate credit, loan covenants, insurance

JEL Classification: G2, G3

Suggested Citation

Nini, Gregory, Insurance Covenants in Corporate Credit Agreements (January 31, 2018). Available at SSRN: https://ssrn.com/abstract=3115304 or http://dx.doi.org/10.2139/ssrn.3115304

Gregory Nini (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

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