by Ed Babtkis,Ross Diversified Insurance Services
Hazard insurance, or fire insurance, is one of the most rudimentary loss-mitigators for lenders and borrowers to protect their investment in real property. But what happens when that piece fails to protect from one of California’s most common perils, fire? Between 2017-2018 over $26 Billion in wildfire-related insurance claims were paid by insurers. In 2019 there were more than 46,000 wildfires and over 2 million homes in California are considered to be in high or extreme fire risk areas. This number is expected to grow as more and more new housing communities are sprouting up in high-risk areas such as San Diego, Temecula and Marin county.
How do insurance companies respond to these losses and growing risks? Typically, by non-renewing insurance, not accepting new policies in fire-prone areas or outright omitting fire insurance altogether in their policies. This leaves borrowers scrambling for insurance and lenders in the dark as to whether their collateral is appropriately insured. Borrowers can turn to California’s FAIR Plan, last-resort option for borrowers funded by California’s insurers that only covers fire-related damages, usually at Actual Cash Value (not Replacement Cost). Having a FAIR Plan policy still requires borrowers to obtain a second policy to cover all other risks.
How do lender’s keep up with these changes? The first step for lenders is to make sure that their insurance requirements at origination are clear and complete. At minimum, the requirements should include:
- List hazards required to be covered
- Amount of insurance equal to replacement cost of building(s)
- Deductible of no more than 5% of loan
- Loss of Rents Endorsement if rental
- Builder’s Risk Endorsement if fix/flip
- Carrier should have AM Best Financial Rating of B++ or better
These insurance requirements should carry over to the servicing of the loan throughout the life of the loan. If an insurance policy is non-renewed, lenders should be able to provide to their borrowers a trusted insurance agency as a recommendation.
Lenders should also have an account with an insurance agency set-up in order to quickly acquire Lender-Placed Insurance as a last resort to protect the property if the borrower cannot obtain their own insurance policy. Lender-placed, or force placed, insurance is insurance of last-resort for lenders. It is typically more expensive than if a borrower obtains their own insurance policy and is often less comprehensive. However, it is a necessary tool in a lender’s toolbox to protect a property that is not insured.
Ross Diversified Insurance Services is licensed in all 50 states and works with over 500 lenders/servicers and over 3,000 investors insuring thousands of properties located throughout the United States. No property is too small; no portfolio is too large. We operate under one simple philosophy: find the right real estate insurance coverage for lenders, borrowers & portfolio managers at the lowest possible rate tailored to each client’s specific needs.