What is Hazard Insurance for SBA For Homeowners?

What Is Hazard Insurance for SBA Loans?

Hazard insurance, also known as property insurance, protects the lender against damage or loss of your business property.

For SBA loans, the SBA requires you to have adequate hazard insurance coverage to help ensure your business assets are protected so you can repay the loan.

As the business owner, you’ll need to purchase a hazard insurance policy, typically a commercial property insurance policy, that names the SBA as an additional insured during the life of the loan.

The policy must provide coverage for the full insurable value of your business property like your building, equipment, inventory, and any improvements.

The SBA looks at a few key things when evaluating your hazard insurance coverage:

• The policy must cover common perils like fire, wind, hail, and vandalism. Flood insurance may also be required if your business is in a high-risk flood zone.

• Coverage amounts must equal the replacement cost value of your property. For buildings, use the estimated replacement cost, not the market value. For equipment and inventory, determine the replacement cost for all items.

• The maximum deductible allowed is typically 5% of the total insured value. Higher deductibles mean more risk so the SBA may require a lower deductible amount.

• The SBA must be listed as an additional insured, loss payee, and mortgagee on the policy to protect their security interest in your property.

• Coverage must extend for the full term of the SBA loan. Lapse in coverage could be seen as default by the SBA.

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Hazard Insurance Requirements for SBA Borrowers

As an SBA loan borrower, you are required to carry hazard insurance on any real estate or physical assets used as collateral for your loan. Hazard insurance protects the lender (in this case, the SBA) in the event that your collateral is damaged or destroyed. The SBA wants to make sure their investment in your business is secured, even if an unforeseen event were to occur.

The SBA has specific requirements for hazard insurance that you must follow:

1. The policy must be in an amount that will cover the replacement cost of the collateral used for your loan. The SBA will determine the minimum required coverage amount to properly insure your collateral.

2. The SBA must be listed as an “additional insured” on your policy. This means that the SBA will receive notification from your insurance provider regarding the status of your policy, including any cancellations or changes.

3. Your deductibles cannot exceed $10,000 per occurrence. Higher deductibles mean less coverage for the SBA in the event of a claim.

4. The policy must provide coverage for all standard perils, including (but not limited to) fire, theft, vandalism, malicious mischief, and wind/storm damage.

Specialized coverage may also be required depending on your industry and collateral.

5. An endorsement or rider may be required to ensure business interruption coverage and/or coverage for equipment or inventory. This protects against loss of income if your business is shut down due to an insured disaster.

6. You must provide evidence of coverage in the form of a certificate of insurance with your SBA loan application. The SBA will review your policy to ensure it meets all requirements before approving your loan.

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FAQs on Hazard Insurance for SBA Loans

Here are some common questions about hazard insurance for SBA loans:

1. What is hazard insurance?

Hazard insurance, also known as property insurance or casualty insurance, protects against damage or loss of property from events like fire, theft, or natural disaster.

2. Do I have to get hazard insurance through the SBA?

No, you can obtain hazard insurance through any provider of your choosing, as long as the policy meets the SBA’s requirements.

The SBA does not provide hazard insurance or endorse any particular insurance companies. You will need to obtain quotes and purchase a policy on your own.

3. How much coverage do I need?

The SBA requires hazard insurance coverage for at least the replacement cost of the property used as collateral for your loan.

The replacement cost is the amount it would cost to completely rebuild your property in the event of a total loss.

4. What happens if I don’t get adequate hazard insurance?

Failure to obtain and maintain the required hazard insurance coverage for the life of your SBA loan could be considered default of your loan agreement.

5. Do I need to provide proof of insurance to the SBA?

Yes, you will need to provide your hazard insurance policy information, including coverage details and carrier information, to the SBA.