If insurance coverage lapses, what remedy might a lender pursue?

• A. The lender may forgive the debt.
• B. The lender may require immediate reinstatement or substitute coverage, or exercise remedies for default if permitted under the agreement.
• C. The lender may wait until the next renewal period.
• D. The lender may substitute the collateral with cash equivalents.

Answer: (D)

Insurance on collateral protects the lender’s security. When coverage lapses, the lender’s priority is to restore protection and preserve the collateral’s value. The lender will typically require the borrower to reinstate the insurance or substitute acceptable coverage (often through force-placed insurance) and, if the borrower doesn’t comply, may pursue remedies for default allowed by the loan agreement. Waiting until the next renewal doesn’t fix the lapse, and substituting the collateral with cash equivalents isn’t a standard remedy under ordinary loan documents. So the appropriate path is to secure reinstatement or substitute coverage or to exercise default remedies as permitted.