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Insecurity Clauses

What is an "Insecurity Clause?"

An "insecurity clause" is a provision in a loan agreement or promissory note that allows a lender to accelerate payment of a debt, demand additional collateral, or halt future advances if the lender has good reason to believe that the debt cannot be paid in accordance with the terms of the agreement. In todays lending environment, it is important for both lenders and borrowers to understand the circumstances under which a lender may exercise rights under an insecurity clause.

When can a lender claim "insecurity?"

According to Colorado's version of the Uniform Commercial Code and recent case law, a lender may claim insecurity under an insecurity clause if a reasonable person, under all the circumstances of the transaction and motivated by good faith, would have accelerated the debt. This is referred to as an objective standard.

Courts in other states are split as to whether to apply an objective standard like Colorado or a subjective standard (or both) in evaluating a lender's good faith belief. A majority of courts apply a subjective standard, analyzing the facts of each particular case to determine a lender's mindset.

You need to know what the applicable law is with respect to your loan agreement or promissory note in order to determine what standard will be applied.

What do Insecurity Clauses mean for you?

Given the current economic climate and the increased risk associated with any loan, lenders should consider including an "insecurity clause" in any new loan agreement, and lenders with existing loans that contain insecurity clauses should evaluate each lending relationship in the context of the insecurity analysis described above.

Borrowers concerned about lenders potentially enforcing an insecurity clause in an existing loan agreement, should consider contacting their lenders to discuss their financial situation to insure that their lenders do not develop a reasonable belief that they are incapable of paying the loan.


The Bankruptcy & Troubled Loans practice group at Otten Johnson has substantial expertise in the areas of lenders' rights, real estate foreclosures, credit workouts, receiverships and bankruptcy. For more information on this Client Alert or for help evaluating your current situation, feel free to contact any of the attorneys in The Bankruptcy & Troubled Loans practice group. For a listing, click here.

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