There’s a growing gap between what commercial property insurers are willing to offer in a policy contract and the insurance requirements imposed by a commercial property lender, and that reality is causing major headaches for real estate businesses. The specialists at B. F. Saul Insurance take a look at this troubling trend and explore ways to ensure you can meet lender insurance requirements in this difficult market.
The Mismatch Between Lenders and Insurers
If you own or invest in commercial real estate, you’re well aware of the state of the property insurance market. With climate change fueling more frequent and severe storms and the incidence of wildfires escalating—along with inflation remaining stubbornly high—insurance companies have found their total claim losses increasing. In response, they’re charging higher rates, restricting coverage, and changing policy terms and conditions for commercial real estate insurance.
Yet, some lenders that write commercial property loans don’t seem to be keeping pace with the evolving insurance landscape. Often, lenders are setting insurance requirements that differ greatly from the limits, terms, and conditions that insurance companies are willing to offer in today’s volatile market. In many cases, their requirements haven’t changed with the times and don’t align with the realities of the current environment.
The unfortunate, unintended consequence is that many commercial real estate owners and investors are finding it difficult to meet the insurance obligations of their loan contracts.
The Two Biggest Culprits
The areas where lender requirements and insurance contracts tend to differ most are deductibles and policy limits.
Deductibles
One of the greatest challenges right now is securing a deductible that enables you to meet your lender’s requirements while controlling your insurance costs.
Lenders often set a maximum deductible amount for the policy as a whole, but many commercial property policies carry different deductibles for different perils. Since water damage is one of the largest drivers of claims, insurers typically set a high deductible for water damage, often in the six figures. Many also assess separate, higher deductibles for named storms, such as hurricanes and other significant weather events.
Even when your insurer is amenable to a lower deductible, you might be willing to take the calculated risk of opting for a higher deductible in exchange for a lower premium, to help offset rising insurance rates. If you have the resources to retain more risk yourself through a higher deductible, it can be frustrating to learn your lender won’t allow you to employ this strategy.
Policy Limits
Commercial real estate businesses in certain markets may also find it tough to secure the policy limits their lenders require. For example, the lender might expect you to carry $30 million in flood coverage on your commercial building, but the insurance company is offering a maximum limit of $15 million. Or the lender might require high limits for ordinance and law coverage, but the insurer won’t extend to that limit.
Though the problem of securing sufficient policy limits can be more acute in regions with a higher-than-average risk of severe weather, commercial real estate businesses in nearly every area of the country are facing this dilemma, and not just for catastrophic exposures.
What You Can Do in Response
Whether you have existing commercial real estate loans or you’re applying for a loan on a newly acquired property, there are steps you can take to ensure you can meet lender insurance requirements.
- For existing loans: Work with your independent insurance advisor ahead of your policy renewal to determine if you might have trouble meeting the lender’s insurance requirements upon renewal. Your broker understands the dynamics of the commercial property insurance market and will work with the insurer to assess how the contract requirements might change. They also have the expertise to develop an exception request on your behalf. When the request is compelling enough and well-documented, some lenders are willing to ease their requirements. For example, when one property owner was able to show that they couldn’t obtain coverage from an admitted carrier, the lender agreed to a non-admitted carrier.
- For new loan applications: Speak with your independent advisor early in the process of purchasing a property. They can review the lender’s requirements and determine if they’ll be difficult to meet in the current market. If you need to take measures like requesting an exception or purchasing a deductible buy-down policy, you’ll want to do it early to avoid unpleasant surprises and prevent a settlement delay.
Turn to B. F. Saul Insurance for Help
The team at B. F. Saul Insurance has extensive experience working with commercial real estate businesses of all types, including owners, developers, property managers, and investors. In addition, our parent company is one of the most successful privately-owned real estate companies in the US, with a large portfolio of commercial properties in the greater Washington, DC area.
We’re well-versed in the nuances and complexities of the commercial property market and the commercial real estate insurance landscape, so we’re the right partner to obtain the best coverage for specific needs—whatever the state of the market. And as a privately-owned independent insurance advisor, we bring the objectivity and autonomy to invest in the resources it takes to provide our clients with the exceptional service they deserve.
Learn more about the volatility and complexity of the current business insurance market in our 2024 outlook guide.
Then schedule a call with a B. F. Saul commercial insurance specialist to find out how we can help you navigate these challenging times.
Jennifer Neal is a Vice President and Account Executive in B. F. Saul Insurance’s Commercial Lines practice. With over two decades of experience in the industry, Jennifer oversees and manages the commercial book of business and assists with agency policies and procedures. She has spent most of her career balancing the producer and account executive roles, working in commercial lines, employee benefits, and personal lines.