Which covenant relates to escrow payments for taxes and insurance?

• A. Insurance covenant
• B. Covenant of good repair
• C. Defeasance clause
• D. Escalation clause

Answer: (A)

Escrow payments for taxes and insurance are a safeguard lenders use to ensure those expenses are paid on time and the loan remains secured. The insurance covenant is the term that best fits this function because it obligates the borrower to maintain adequate insurance on the property and often includes an escrow arrangement to collect and pay the insurance premiums (and sometimes taxes) as they come due. This arrangement protects the lender by preventing lapses in coverage or missed tax payments that could jeopardize the loan. The other covenants address different requirements—keeping the property in good repair, replacing the loan with alternative collateral, or handling increases in payments—so they don’t specifically capture the purpose of escrow for taxes and insurance.