What Is Chattel Mortgage Non-Filing Insurance?

In finance, the term “chattel mortgage non-filing insurance” refers to a type of insurance product purchased by chattel mortgage providers and other financial firms. 

Specifically, it protects against losses arising when the lender has not filed the necessary paperwork to register its legal claim against the assets used as collateral for the chattel mortgage loan. In those situations, the lender may not be able to enforce its claim, particularly when the borrower has obtained chattel mortgages from multiple lenders.

Key Takeaways

  • Chattel mortgage non-filing insurance protects secured lenders who rely on movable assets as their collateral.
  • It specifically protects against the risk of being unable to enforce a claim against the assets because of a failure to file the necessary paperwork.
  • Chattel mortgage non-filing insurance does not protect against other potential risks, such as the collateral in question becoming damaged during the loan term.

How Chattel Mortgage Non-Filing Insurance Works

The term “chattel mortgage” is relatively uncommon in the United States, as it is mainly used in countries whose legal systems are based on English law, such as the United Kingdom or Australia. In essence, however, chattel mortgages are a type of secured loan in which the underlying assets are movable in nature, as opposed to being fixed in place. Examples of the types of assets used as collateral in a chattel mortgage loan include furniture, cars, and equipment.

Borrowers generally seek to obtain chattel mortgage loans when they want to keep their financing costs relatively low but are unable to rely on traditional mortgage financing. For instance, an industrial firm that leases its premises might use chattel financing against its industrial machinery. Pledging the machinery as collateral could allow it to secure lower borrowing costs as compared to an unsecured loan.

For lenders, one of the risks involved in chattel mortgage lending is that the borrower could theoretically move the collateral away from its original premises without the lender’s knowledge. To protect against this, lenders will obtain legal title to the assets as part of the loan process, and will return this legal title to the borrower when the loan is repaid. As an added precaution, lenders will generally file notice of this legal change with the relevant property registration authority to protect themselves if any future legal dispute were to arise. If the lender fails to do so correctly, they might find themselves unable to prove that they in fact have legal claim to the chattel assets. To protect against this, lenders can purchase chattel mortgage non-filing insurance to cover any losses arising from their failure to file their claim.

Real-World Example of Chattel Mortgage Non-Filing Insurance

The non-filing component of chattel mortgage non-filing insurance refers to the intentional failure of the lender to file the chattel mortgage record or files with the proper authorities. In that situation, it is possible for multiple lenders to have claims against the assets despite each of them believing they are the only party with a valid claim. By not filing, the lender may find it impossible to enforce the terms of the mortgage by taking possession of the chattel used as collateral, as other third parties may have properly filed documents supporting their claims.

It is in this scenario that chattel mortgage non-filing insurance can become useful. It is important to note, however, that this insurance only protects against situations where the policyholder is unable to enforce the mortgage because of the failure to file. It would not, for example, apply if the policyholder filed the necessary paperwork but was unable to enforce the mortgage for other reasons. For instance, if the lender is unable to take possession of the collateral because the collateral was damaged or destroyed prior to the loan being initiated, this would not be covered by chattel mortgage non-filing insurance.