Many who own or purchase apartment buildings carry loans, and those lenders will invariably have insurance requirements that must be met in order to close the loan and to remain in compliance. It is always best to comply with these requirements, as not doing so could result in financial consequences. Occasionally there is some flexibility, but that is rare, especially when the loan is backed by Fannie Mae or Freddie Mac. Here are some of the more common apartment owner insurance requirements.
Building Coverage
Insurance coverage for the building(s) should be based on a detailed reconstruction cost estimate, which would be generated by the insurance agent. To ensure coverage is updated to keep up with inflation and increasing construction costs, this estimate should be updated every year at renewal, and coverage adjusted accordingly.
Replacement Cost
There are generally two valuation methods; replacement cost and actual cash value. Replacement cost pays the full cost of replacement, while actual cash value factors in depreciation. Therefore actual cash value may not pay the entire cost of a loss. Replacement cost is a common commercial apartment insurance lender requirement.
Special Form
Special form covers all “perils” except those that are excluded. An alternative is basic form, or named perils, which covers specific perils, including fire, lightning, explosion, smoke, windstorm, hail, aircraft/vehicles, vandalism, riot, sprinkler leakage, sinkhole collapse, and volcanic action. Special form is ideal, and is a typical multifamily insurance lender requirement.
Coinsurance
With coinsurance, a penalty could be imposed for not covering the building at the value determined by the reconstruction cost estimate. For example, if the building is only covered at 50% of its value, then the carrier could only pay 50% of repair costs after a claim. For this reason, lenders often want apartment building insurance policies to waive coinsurance.
Deductible
Higher deductibles result in lower premiums. Lenders usually have maximum apartment complex insurance deductibles that are allowed.
Business Income
Business income covers lost rental income if units are rendered uninhabitable by a covered loss. Lenders commonly require that apartment building insurance include enough coverage to cover at least 12 months of rental income.
Ordinance
Ordinance coverage pays to upgrade (ordinance C), demolish (ordinance B) or rebuild (ordinance A) a building after a loss if it is required by law. For apartment owner insurance, the lender requirement is typically 100% ordinance A, 10% ordinance B and 10% ordinance C.
Flood
If an apartment complex is in a flood zone, lenders will require flood insurance, which is a separate policy.
Liability
Liability offers coverage if held responsible for injuries or property damage. Apartment complex insurance requirements are based on the number of units. Larger complexes may require an umbrella, which extends liability. Lenders often will not allow exclusions for assault & battery, abuse & molestation, animal attacks, and firearms.
Terrorism
Lenders will usually want multifamily insurance policies to include terrorism under both liability (to cover accusations of terrorism) and property (to cover damage caused by terrorism).
Risk Transfer
Lenders commonly require certain mechanisms to be in place on an apartment building insurance policy to transfer risk. Examples are additional insured and loss payee status.
Need help with apartment building insurance lender requirements? Contact Chris Elliott Insurance Agency!
Our Seattle-based insurance agency has insured countless apartment buildings over the years, and understands complex lender requirements. Reach out to our team today!
