In today’s dynamic real estate landscape, it has become increasingly crucial for property owners and developers to meticulously examine, understand, and potentially negotiate their lender’s insurance requirements. The paramount objective for both the property owner or developer and their lender should be aligned—safeguard the asset with proper insurance coverage.
Key considerations
Here are some common negotiation topics to consider when reviewing your lender’s requirements:
Umbrella limits
The cost per-million remains high. Some previously executed loan agreements include excess/umbrella limits once more readily available and cost-effective limits that are now more difficult to secure and potentially cost prohibitive.
Catastrophic weather (CAT) limit
It is essential to work with your advisor to obtain CAT modeling data. Despite increasing weather events, not all geographies and assets pose the identical risk for earthquake, windstorm, flood, and convective storms. The goal should be appropriate CAT limits commensurate with your geography and construction type.
Deductibles
The once ubiquitous $10k-$25k all-risk deductibles are increasingly more difficult to achieve, especially on wood frame, residential, and industrial assets. If available, they may come at a significant cost. All owners should prepare for higher deductibles on all-risk, water damage, and CAT events that may require lender negotiation.
Phased construction policies
Some construction lenders do not readily accept a phased policy approach, wanting the totality of a project’s risk insured at once. Their concerns are not without merit and can often be quelled with proper placement, negotiation, and accurate policy limits.
Key takeaway
A borrower must comply with their lender’s insurance requirements—this piece by no means suggests noncompliance. However, challenging market conditions coupled with often boilerplate lender insurance requirements may create an insurance situation that warrants discussion and possible variance from standard issue lender insurance requirements. Your advisor should assist you by collaborating on the proper due diligence and negotiation needed to achieve satisfactory resolution and continued compliance.
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Authored by Sarah Shepard McGuinness, Commercial Risk Partner at The Baldwin Group.
This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The content of this document is made available on an “as is” basis, without warranty of any kind. The Baldwin Insurance Group Holdings, LLC (“The Baldwin Group”), its affiliates, and subsidiaries do not guarantee that this information is, or can be relied on for, compliance with any law or regulation, assurance against preventable losses, or freedom from legal liability. This publication is not intended to be legal, underwriting, or any other type of professional advice. The Baldwin Group does not guarantee any particular outcome and makes no commitment to update any information herein or remove any items that are no longer accurate or complete. Furthermore, The Baldwin Group does not assume any liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Persons requiring advice should always consult an independent adviser.
