You need hazard insurance on any property that you use as collateral for an SBA 7(a), 504 or EIDL loan of more than $50,000. If you don’t have it — or if you fail to maintain the property in accordance with the SBA’s requirements — you may not be able to get an SBA loan, now or in the future.
Hazard insurance is a type of business insurance that can help you repair or replace buildings, equipment or inventory after damage. Most businesses should have this coverage, especially if they own or rent property or have valuable inventory or equipment.
How much do you need?
What is hazard insurance for an SBA loan?
Business hazard insurance is a policy that pays out when buildings are damaged in accidents or natural disasters. The SBA requires hazard insurance on assets pledged as collateral for SBA loans over $50,000. This is to ensure that damaged property can be repaired and that it will maintain its value.
Most insurance companies don’t sell a policy called “business hazard insurance.” Instead, look for commercial property insurance. This type of policy covers the buildings your business owns or rents, as well as the contents inside. It can also help make up for the income your business loses while making repairs.
When is hazard insurance required for an SBA loan?
You need business hazard insurance on property that serves as collateral for an SBA loan. Specific requirements, however, vary by loan type:
SBA 7(a) loans
The SBA requires hazard insurance for all assets pledged as collateral on SBA 7(a) loans greater than $50,000.
SBA Express and Export Express loans are the exception to this rule. Lenders do not have to require hazard insurance on Express loans. But if they don’t, they must provide the reason why in the loan file.
SBA 504 loans
For SBA 504 loans with project costs greater than $50,000, the SBA requires hazard insurance on all assets pledged as collateral.
SBA economic injury disaster loans
SBA economic injury disaster loans (EIDLs) worth more than $50,000, which have to be secured by collateral, require hazard insurance.
SBA flood insurance requirements
If your collateralized property is in a flood hazard area, you’ll need a flood insurance policy. You'll also need flood insurance for any personal property (equipment, fixtures or inventory) that is collateral for the loan — if that property is in a building which is located in a flood hazard area and that building is also collateral for the loan.
Flood insurance coverage must equal the lesser of two amounts: the loan's outstanding principal balance, or the maximum coverage available under the National Flood Insurance Program.
How much coverage do you need and by when?
The SBA specifies that your hazard insurance must cover the full replacement cost. If that’s not an available option, then it must cover the maximum insurable value.
The administration also states that your hazard insurance policy must include a mortgagee clause. This means the policy must:
Name your lender as protected.
Guarantee the lender’s payout even if you make an error in your own coverage.
Give the lender a 10-day warning before the policy lapses.
The SBA states that lenders must ensure the required hazard insurance is in place before disbursing SBA Express, Export Express and 7(a) Small Loans, specifically. It doesn’t spell this out in such explicit terms for the wider 7(a) loan program, or for the 504 program. But it’s reasonable to expect that your lender will confirm coverage is in place before closing.
What if you can't get hazard insurance?
For SBA 7(a) and 504 loans over $50,000, hazard insurance is a must for loan approval. There are, however, two exceptions to this, which apply to loans for $500,000 or less:
You’ve pledged real estate as collateral, but the lien on that real estate will not be in first position and you’re unable to get hazard insurance.
The full replacement value of your business assets is $50,000 or less.
The hazard insurance rule may become a snag — or even a total deal breaker — if the collateral you’ve pledged (and therefore need to cover with the insurance) is in an area where wildfires and floods are a real possibility. Insurance carriers are often wary of covering property in these areas. And if they do, prices may be unaffordable. Your best bet is to start insurance conversations early, as soon as you apply, rather than waiting until the underwriting stage.
Expert on the ground
Where to get hazard insurance for an SBA loan
You can get hazard insurance for an SBA loan from most business insurance companies. You may be able to get a quote and buy business insurance online in a matter of minutes.
Getting multiple quotes can help you find the best business insurance coverage at the best price. Here are a few of NerdWallet’s picks for where to get hazard insurance for an SBA loan.
Ergo Next
Best for: Getting commercial property insurance right away.
Ergo Next sells business insurance policies online to small businesses, in a transaction that only takes only a matter of minutes. Ergo Next’s commercial property insurance policy includes business interruption insurance, which can help make up for your business’s lost income after a disaster.
Chubb Small-Business Insurance
Best for: Entrepreneurs who need a business owner’s policy.
Commercial property insurance is often sold as part of a business owner’s policy (BOP), which also includes general liability insurance. Chubb’s BOP is one of the best on the market because it includes business interruption insurance, extra expense coverage and coverage for accounts receivable records. If your business earns less than $2 million in annual revenue, you can buy a policy online with the help of an automated coverage assistant.
Nationwide
Best for: Businesses that also need flood insurance.
If you’re in a region where you need flood insurance, you can work with an independent insurance agent to buy a National Flood Insurance Program policy from Nationwide. You can also get business property insurance coverage and other commercial insurance coverage you need from this insurer. Use Nationwide’s website to find a local agent who sells the company's policies.
