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If you’re borrowing a Small Business Administration (SBA) 7(a) or 504 loan of more than $50,000, you may need to purchase a hazard insurance policy. The SBA also typically requires hazard insurance on Economic Injury Disaster Loans (EIDLs) over $25,000.
Hazard insurance can help cover the costs of repairing business assets that get damaged by a storm, fire, or other covered event. Even if it’s not required, hazard insurance can be useful if you have valuable property or equipment.
Here’s a closer look at what hazard insurance is and when you need it for an SBA loan.
Key Points
• The Small Business Administration (SBA) requires hazard insurance for 7(a) and 504 loans exceeding $50,000 and for Economic Injury Disaster Loans (EIDLs) above $25,000.
• Hazard insurance protects a business’s pledged collateral against damages from covered events such as fire, theft, vandalism, and wind.
• Standard policies typically exclude floods and earthquakes, requiring separate coverage for those perils when collateral lies in a designated flood hazard area.
• Borrowers must secure a policy covering the full replacement cost of pledged collateral or the maximum insurable value if full replacement is unavailable.
• The policy must name the lender as a loss payee for business property or include a mortgage clause for real estate, directing proceeds to the lender upon damage.
What Is SBA Hazard Insurance?
The SBA doesn’t provide hazard insurance directly, but it does require it to borrow most SBA loans greater than $50,000. Hazard insurance is a type of property insurance that protects a business’s assets against damages caused by covered events, like fire, theft, and vandalism.
Hazard insurance can help cover the costs of repairing or replacing buildings, supplies, equipment, inventory, and other business property. The SBA and its lending partners might require hazard insurance to reduce their financial risk when they offer a loan.
Some insurance companies call this coverage commercial property insurance rather than business hazard insurance. It’s the same thing and will generally cover the building your business owns or rents and what’s inside.
When Is Hazard Insurance Required for an SBA Loan?
Hazard insurance requirements can vary depending on the type of SBA loan you’re looking to borrow. Let’s take a closer look.
Requirements for SBA 7(a) and 504 Loans
The SBA typically requires hazard insurance for both 7(a) loans and 504 small business loans that are greater than $50,000. If you’re borrowing more than $50,000, you’ll need hazard insurance to cover all the assets you pledged as collateral for your loan, along with meeting other conditions, like down payment requirements.
SBA 7(a) loans are the SBA’s primary business loan program. You can use an SBA 7(a) loan for various purposes, including working capital, inventory, and debt refinancing. SBA 504 loans are generally used to finance major fixed assets like commercial real estate, construction, and heavy equipment.
Requirements for SBA EIDL Loans
The SBA also provides Economic Injury Disaster Loans (EIDLs) to small businesses that have been affected by declared disasters. The SBA requires you to get hazard insurance if your EIDL loan exceeds $25,000.
An EIDL may have specific coverage requirements, such as a plan that covers at least 80% of the property’s value. EIDLs are mainly intended to help with working capital, rather than to finance property or equipment purchases.
Check your specific loan agreement for information around hazard insurance and any other requirements.
Recommended: Conventional Business Loans vs. SBA Loans
What Does SBA Hazard Insurance Cover?
SBA hazard insurance covers damage or destruction of property caused by wind, fire, theft, vandalism, or other covered events. Plans may offer commercial property (real estate) coverage or business personal property coverage.
Commercial property coverage usually covers buildings and permanent fixtures, while business personal property coverage mainly protects movable assets like equipment and furniture. Here are a few examples:
| Covered Peril | Commercial Real Estate Coverage Covers | Business Personal Property Coverage Covers |
|---|---|---|
| Fire and smoke | Office, store, or warehouse repairs | Replacement of inventory, furniture, or equipment |
| Theft | Damage to building caused by break-in | Stolen computers, tools, merchandise, or equipment |
| Vandalism | Repairs to doors, windows, or walls | Replacement or repair of business equipment |
| Wind, hail, and storms | Repairs to roof or structural damage | Replacement of inventory or equipment |
| Lightning and explosions | Covered structural damage | Replacement of electronics or machinery |
Standard plans don’t cover floods or earthquakes, but you may be able to purchase a separate policy for this kind of coverage. Your hazard insurance also probably won’t cover standard wear and tear.
Coverage Amount and Loss Payee Requirements
The SBA typically requires you to get a hazard insurance plan that can fully cover the replacement cost for your pledged collateral. If you can’t get full replacement cost coverage, you may qualify with a plan that covers the maximum insurable value.
You’ll also need a policy that names your lender as a loss payee (for business property coverage) or has a mortgage clause (for real estate coverage). This means your lender will receive insurance proceeds if there’s damage to your property.
Your lender can tell you the exact name and designation you need to include on your policy. You’ll need to provide proof of qualifying coverage before your SBA loan can close. If you can’t meet the requirements, you could explore getting a business loan without collateral.
Recommended: SBA Express Loans Explained
How To Get SBA Hazard Insurance
If hazard insurance is one of your SBA loan requirements, here are some steps you can take to find a policy:
• Read over your insurance requirements: Find out which assets you need to insure, how much coverage is necessary, and whether you need a specific loss payee or mortgagee clause. If you have a business insurance policy already, review it to see if it meets the requirements.
• Make an inventory of your business property: List the buildings, equipment, inventory, and other assets you need to cover, and estimate their replacement costs.
• Compare insurance providers: Compare quotes from multiple providers to find the best rates available to you. Make sure you understand what’s covered and what’s excluded, along with coverage limits, premiums, and deductibles.
• Confirm your policy meets requirements: Before you buy a policy, check with your lender that it fulfills all the requirements of your SBA loan.
• Submit proof of insurance: After you purchase your plan, submit your documents to your lender. Make sure to renew your plan on time so you don’t have a lapse in coverage.
The Takeaway
If you’re borrowing an SBA 7(a) or 504 loan for more than $50,000, you may need hazard insurance that covers the full replacement cost of your pledged collateral. Depending on that collateral and your loan type, you might need coverage for commercial real estate or the equipment and other assets inside it.
Work with your lender to go over your specific SBA loan hazard insurance requirements, and confirm that your coverage amount and loss payee designation (or mortgagee clause) meet the terms and conditions of your loan. By taking these steps, you can protect your business and pave the way toward closing on your SBA small business loan.
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FAQ
Does SBA hazard insurance cover flood damage?
A standard hazard insurance or commercial property insurance plan usually doesn’t cover damage caused by flooding. Instead, you’d have to purchase a separate flood insurance plan. When you are applying for an SBA loan, you might be required to purchase a flood insurance policy if your business property or collateral is located in a special flood hazard area.
What is the difference between hazard insurance and homeowners insurance?
Hazard insurance is often one part of a broader homeowners insurance plan. Hazard insurance covers damage to property from certain events, like fire or vandalism. Homeowners insurance usually includes hazard insurance along with coverage for other issues, like loss of personal belongings or someone getting injured on your property. Homeowners insurance typically covers personal property; it offers limited or no coverage for business property.
Do I need hazard insurance for an SBA loan under $50,000?
You usually don’t need hazard insurance for SBA loans of $50,000 or less. However, it’s typically required to cover collateral that’s pledged on an SBA loan greater than $50,000.
What is a loss payee, and why does the SBA require one?
A loss payee is a person or entity that receives claim payouts if the insured property is damaged or destroyed. The SBA may require you to name your lender as a loss payee to protect its financial interest. That way, the lender will be financially protected if the collateral gets damaged while you (the borrower) still owe money on the SBA loan.
Can I use my existing business insurance to satisfy the SBA hazard insurance requirement?
You may be able to use your existing business insurance to satisfy the SBA loan hazard insurance requirement. It will need to meet coverage requirements, and you might need to update your loss payee or mortgagee clause. You can ask the lender to confirm whether your existing policy meets requirements.
Photo credit: iStock/Andrii Lysenko
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