Chattel Mortgage Non-Filing Insurance Definition

What Is Chattel Mortgage Non-Filing Insurance?

In finance, “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 be unable to enforce its claim, particularly when the borrower has obtained chattel mortgages from multiple lenders.

Understanding Chattel Mortgage Non-Filing Insurance

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

Borrowers generally seek to obtain chattel mortgage loans to keep their financing costs relatively low when they cannot rely on traditional mortgage financing. For instance, an industrial firm that leases its premises might use chattel financing for its industrial machinery. Pledging the machinery as collateral could allow the company to secure lower borrowing costs compared to an unsecured loan.

For mortgage 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 obtain legal title to the assets as part of the loan process and return this legal title to the borrower when the loan is repaid.

As an added precaution, lenders generally file notice of this legal change with the relevant property registration authority to protect themselves if any future legal dispute arises. If the lender fails to do so correctly, it might be unable to prove that it has a legal claim to the chattel assets. To protect against this, lenders can purchase chattel mortgage non-filing insurance to cover any losses arising from failure to file their claim.

Consequences and Benefits

The non-filing component of chattel mortgage non-filing insurance refers to the lender's intentional failure to file the chattel mortgage record or file it with the proper authorities. In that situation, multiple lenders can 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.

In this scenario, chattel mortgage non-filing insurance can become helpful. However, it is important to note this insurance only protects against situations where the policyholder cannot enforce the mortgage because of the failure to file.

It would not, for example, apply if the policyholder filed the necessary paperwork but could not enforce the mortgage for other reasons. For instance, if the lender cannot take possession of the collateral because the collateral was damaged or destroyed before the loan was initiated, this would not be covered by chattel mortgage non-filing insurance.

Frequently Asked Questions (FAQs)

The Bottom Line

Chattel mortgage non-filing insurance protects lenders against losses arising from improper filing when seeking to claim against the assets used as collateral in a chattel mortgage. Chattel mortgages function differently than regular mortgages, and obtaining insurance to protect from disagreements on collateral claims can significantly help the lender.