Beware of Lender “One Size Fits All” Insurance Requirements

One of the stress points for lenders and their underwriters is the fear of a foreclosure due to substantial property damage and improper insurance held by a borrower.  Consequently, lending has become an increasingly automated and overcautious process which can generate “standard” insurance requirements, regardless of the leveraged property’s actual risk profile.

Can a lender cause you to overspend on real estate insurance?

We had a client in the midst of acquiring an 18 story apartment building on the coast of Florida – an area subject to tropical storms and hurricanes. The lender required the buyer to purchase wind and flood insurance covering the full replacement cost of the building. During discussions with the lender’s insurance representative, I commented on the flood requirement “that’s an awfully huge tidal wave that can reach the 18^th floor!” In our minds, it was an obvious overkill that the underwriting process overlooked. The lender agreed, struck the flood requirement for the full replacement cost and accepted a much lower limit instead. As you might imagine, this saved our client significant premium dollars.

So how do we prevent such overspend?

As your insurance advocate, the last thing we want is for insurance to unnecessarily delay or financially burden a transaction. To avoid this, we recommend you provide your broker or agent:

• Available property details including type/age of construction, number of stories, total square footage, fire protection, tenants, annual rents, etc. (an appraisal will include much of this information)
• Insurance requirements from all parties involved
• Contact information for involved parties insurance representatives
• Updates on the status of the transaction and projected close

Finally, please allow your insurance broker or agent sufficient time to perform.  Similar to the lenders, insurance companies have their own internal processes to properly underwrite your risk.

Our Real Estate Practice Group members are well versed in the various types of real estate transactions and know how to assist with all insurance related components of a deal.  Whether it’s overcoming a lender’s impractical and cost-prohibitive insurance requirement or, conversely, securing unique coverage at a reasonable price to accommodate such a requirement, we work diligently in your best interests.

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