What occurs if collateral is lost or damaged?

When collateral is lost or damaged, the secured party maintains the right to claim insurance proceeds related to that collateral. This principle is based on the expectation that if the collateral is insured, the secured party can be compensated for the loss or damage by the insurance company, ensuring that they have a form of recovery for their secured interest.

The right to claim insurance proceeds reinforces the security interest that the secured party has in the collateral because it serves as a fallback source of payment if the physical asset is no longer available or is impaired in value. This aspect of secured transactions illustrates the importance of maintaining insurance on valuable collateral, which can provide protection for the lender's interest.

In contrast, if the secured party were to lose all rights to compensation, or if the collateral remained intact in legal terms, these scenarios would not reflect the practical realities of secured transactions. Additionally, if the lender were required to forgive the obligation without recourse to insurance proceeds, that would undermine the purpose of the security interest. Thus, the option regarding the right to claim insurance proceeds accurately represents the legal and practical outcome in such a circumstance.