Updated Insurance Requirements

Loan Applicants have always had to obtain appropriate insurance, and Lenders have always had to ensure it’s included in the Terms & Conditions and the Credit Memo. No new news there.

But there are some new updates that Lenders should be aware of to make sure they remain in SBA compliance.

Hazard Insurance: 

• Hazard insurance is required on all assets pledged as collateral for 7(a) and 504 loans greater than $50,000.  If hazard insurance is not available, the loan cannot be approved. 

  
  

• SBA requires the Applicant to obtain separate policies when the business is located in a state where additional coverage, such as wind, hail, earthquake (or any other), is mandated.

  
  

• For SBA Express and Export Express, if the Lender doesn’t require hazard insurance, justification must be documented in the loan file.

  
  

Flood Insurance:

• If any portion of a building pledged as collateral for a loan is located in a special flood hazard area, the Applicant must obtain flood insurance.

  
  

• Likewise, if any equipment, fixtures, or inventory pledged as collateral is located in a building where any portion is located in a flood hazard zone, the Applicant must obtain flood insurance on the business personal property.

  
  

Life Insurance:

• The Lender must include written documentation from a licensed insurer if the principal is uninsurable.

  
  

• A Lender may accept a pledge of an existing life insurance policy. Credit life insurance and/or whole life insurance should not be required.

  
  

• Remember: when there’s a collateral shortfall, life insurance is required, covering the full amount of the collateral shortfall for sole proprietorships, single member LLCs, or for any business dependent upon one owner’s active participation. CAUTION: Be sure any succession plan makes sense before using it to waive life insurance requirements. Do the parties named in the succession plan have the experience to carry the business and the authority to do so?

  
  

These insurance requirements may seem burdensome, but in the end they help protect your guaranty as well as the business’s long-term viability. And as always, we’re here to help, either as part of a full-service SBA loan review, with SBA training for your team, or any other Lender consulting services we can provide to support your team and your SBA lending success.