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.