What insurance do CMBS lenders require for apartment buildings?
CMBS loan agreements typically impose the strictest insurance requirements, including replacement cost coverage, terrorism insurance, and detailed deductible and carrier-rating thresholds.
Commercial mortgage-backed securities (CMBS) loans are securitized and sold to investors, which means the insurance requirements in the loan documents tend to be more detailed and rigid than those of agency lenders. CMBS loan agreements and pooling and servicing agreements (PSAs) typically require property insurance at 100% replacement cost with an agreed amount endorsement, general liability at $1,000,000 per occurrence and $2,000,000 aggregate, and terrorism coverage under the Terrorism Risk Insurance Act (TRIA).
CMBS loans commonly cap all-perils deductibles at $25,000 or the greater of $25,000 and 1% of the total insured value, and named-storm or wind deductibles at 5% of the total insured value. The insurer must typically hold an A.M. Best rating of A- (VIII) or better, which is more restrictive than agency requirements. Business income coverage must equal at least 12 months of gross income, and some PSAs require 18 months.
Because the CMBS special servicer enforces compliance on behalf of the trust, insurance deficiencies that might receive a temporary waiver from a portfolio lender are more likely to trigger a forced cure or force-placed coverage in a CMBS loan. Borrowers should carefully review the insurance section of their CMBS loan documents with their broker before each renewal and build extra lead time into the renewal process to address any carrier-rating or deductible compliance issues.
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Related Questions
What types of insurance does an apartment building owner need?
Apartment owners typically need commercial property, general liability, loss of rents, umbrella, and workers compensation coverage at minimum.
How much does apartment building insurance cost?
Apartment building insurance typically costs $500 to $3,000 per unit annually, depending on the property's size, location, age, and coverage needs.
What does general liability insurance cover for apartment buildings?
General liability covers bodily injury and property damage claims from third parties, such as a tenant or visitor injured in a common area.
Do I need flood insurance for my apartment building?
If your property is in a FEMA-designated flood zone, your lender almost certainly requires it. Even outside flood zones, flood coverage is worth considering.
What is loss of rents coverage and how does it work?
Loss of rents coverage replaces rental income lost when units become uninhabitable due to a covered property damage event, such as a fire or major storm.