Does an SBA loan require hazard insurance?
Short answer
Yes, on all assets pledged as collateral for 7(a) loans and 504 projects over $50,000. If coverage is not available, the loan cannot be approved. Source: SOP 50 10 8.1, Sec. A, Ch. 5, Para. C.1.
Yes, for 7(a) loans and 504 projects over $50,000. SOP 50 10 8.1, Sec. A, Ch. 5, Para. C.1, requires hazard insurance on all assets pledged as collateralProperty a lender can take and sell if a loan is not repaid. . If hazard insurance is not available, the loan cannot be approved. A separate policy is needed if your state requires added coverage such as wind, hail or earthquake.
The regulation at 13 CFR § 120.160(c) still says $500,000. SOPs are Loan Program Requirements under 13 CFR § 120.10, so expect lenders to apply the $50,000 line.
Two exceptions for loans of $500,000 or less
- Residential real estate pledged in a lien position other than first, if hazard insurance cannot be obtained on it.
- A business whose assets have a full replacement value of $50,000 or less.
SBA Express and Export Express
A lender that does not require hazard insurance must document the reason in its loan file. The SOP's example is an undue burden given a small loan (Para. C.1.d).
What the policy must do
- Cover full replacement cost. If that is not available, cover maximum insurable value.
- Name the lender in a mortgagee clause for real estate or a lender's loss payable clause for personal property. On a 504 loan the clause favors the Certified Development Company (CDC) and SBA.
- Give the lender at least 10 days' prior written notice of cancellation.
A flood zone adds a separate requirement. Flood insurance follows Sec. A, Ch. 5, Para. C.3, and 13 CFR § 120.170.
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