A commercial lender will not fund until the property is insured to a defined standard, and that standard is narrower than a normal business owner's policy. The short version: special-form building coverage at 100% of the insurable value of the improvements or the unpaid principal balance on an agreed value basis, claims paid on a replacement cost basis, a deductible no greater than 10% of the insured value of the building, coinsurance no lower than 80% (or an agreed amount endorsement instead), commercial general liability at $1MM per occurrence and $2MM aggregate per location, flood coverage where the property sits in a special flood hazard area, and the lender named as mortgagee, loss payee and additional insured on the correct forms.
Files stall on insurance more often than borrowers expect, and almost never because the property is uninsurable. It is because the binder came back with a $50,000 deductible, or the named insured is the operating company instead of the title-holding entity, or the certificate is an ACORD 25 when the property policy needs an ACORD 28. Each is a two-day fix before the binder is issued and a two-week fix at the closing table. Here are the requirements in the order an underwriter checks them.
The requirements at a glance
| Item | Requirement |
|---|---|
| Building/hazard form | Fire, lightning and extended coverage with a special form coverage endorsement |
| Coverage amount | 100% of the insurable value of the improvements, or the unpaid principal balance of the mortgage on an agreed value basis |
| Claims basis | Replacement cost. Actual cash value is not acceptable |
| Coinsurance | Clause allowed at 80% or greater, or an agreed amount endorsement in place of a coinsurance clause |
| Deductible | Must be specified, and cannot exceed 10% of the insured value of the building, for all perils |
| Wind / named storm / hail | If excluded from the primary building coverage, a separate wind policy must be submitted for review |
| General liability | $1MM per occurrence and $2MM aggregate per location |
| Flood | Required if the property is in a special flood hazard area |
| Policy term | 12-month term per property location |
| Named insured | Must be the borrower |
| Carrier rating | "B+" or better per A.M. Best property and casualty ratings |
| Certificate forms | ACORD 28 for the property policy, ACORD 25 for all liability lines |
| Cancellation notice | 30 days for notice of cancellation, 10 days for non-payment |
Coverage amount: insurable value, not purchase price
This is the single most common source of confusion, and it costs borrowers real money in both directions.
The requirement is 100% of the insurable value of the improvements. Insurable value is not the purchase price, not the appraised value, and not the loan amount. It is the cost to rebuild the structure. It excludes land, and land is often a large share of what you paid.
There are two acceptable sources for that number: the appraisal report, or a determination by the insurance agent or underwriter. Commercial appraisals frequently carry a cost-approach figure that speaks to insurable value; where they do, that is the number to hand your agent. Where they do not, your agent's own replacement-cost estimate is acceptable.
The alternative basis is the unpaid principal balance of the mortgage on an agreed value basis. That is an either/or, not a floor and a ceiling.
Where borrowers get hurt is insuring to purchase price. On a property where land carries half the value, insuring to price means paying premium on coverage you can never collect — a total loss pays the cost to rebuild the building, not the value of the dirt underneath it.
Replacement cost, not actual cash value
Claims must be paid on a replacement cost basis. Actual cash value is not acceptable.
An actual cash value policy pays replacement cost less depreciation. On a forty-year-old roof, that can be a fraction of what a new roof costs. A replacement cost policy pays to rebuild with like kind and quality without the depreciation haircut. ACV policies are cheaper, which is exactly why they show up on binders for older buildings — and if your agent quoted ACV to hit a premium target, the policy will be rejected in review.
Coinsurance: 80% or an agreed amount endorsement
A coinsurance clause is allowed at 80% or greater. An agreed amount endorsement can be in place of a coinsurance clause.
Coinsurance is a penalty mechanism. An 80% clause means you have agreed to carry coverage equal to at least 80% of the property's insurable value. Carry less and suffer a partial loss, and the insurer pays only the proportion of the claim that your actual coverage bears to the required coverage. Underinsure by a third, and a partial claim gets cut by roughly a third.
The program allows 80% or higher; a clause below that will not be accepted. An agreed amount endorsement removes the coinsurance test entirely — the carrier and the insured agree in advance on the value and the penalty does not apply — and is an acceptable substitute for the clause.
Where coinsurance is allowed, the amount of coverage must be determined using the insurable value from the appraisal report or as determined by the insurance agent or underwriter — the same two sources as the coverage amount itself.
The deductible cap
The deductible amount must be specified, and it cannot exceed 10% of the insured value of the building, for all perils.
It must be specified. A certificate that says "see policy" or leaves the deductible field blank is not reviewable — the underwriter has to read the number off the document.
It cannot exceed 10% of the insured value of the building, for all perils. "For all perils" means the cap is not only about the base all-other-perils deductible. Wind and hail deductibles in coastal and hail-belt markets are commonly written as a percentage of insured value — 2%, 5%, sometimes higher — and those percentage deductibles are subject to the same 10% cap.
If your building is insured at $800,000, the ceiling on any deductible is $80,000 — generous for a base deductible, tight for a named-storm deductible in a hard market. Coastal borrowers are the ones who find out at binder review that their wind deductible is out of tolerance.
Wind, named storm and hail
If wind, named storm and hail are excluded from the primary building coverage, a separate wind policy must be submitted for review.
Evidence must be provided for properties located in Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and Texas.
In those eight states one of two things has to be true: the primary building policy includes wind and hail, or a standalone wind policy is on the file. There is no third option where wind is simply excluded and the file proceeds. Standalone wind policies are common there and perfectly acceptable — they just have to be produced for review, not mentioned in passing.
Flood
Flood insurance is required if the property is located in an area designated as a special flood hazard area.
The minimum amount of flood insurance required for first mortgages is the lowest of:
- 100% of the replacement cost of the insurable value of the improvements; or
- The maximum insurance available from the NFIP; or
- The unpaid principal balance of the mortgage loan
Read the word "lowest" carefully. This is a three-way test where the smallest of the three governs, which is why NFIP maximum limits are frequently the operative number on commercial buildings — the NFIP cap on a non-residential structure is well below what a mid-sized commercial building costs to rebuild. When the NFIP maximum is the lowest of the three, the NFIP maximum is the requirement.
Whether the property sits in a special flood hazard area is set by the flood zone determination ordered on the file, not by whether the borrower has ever seen water on the site. Zone maps get redrawn, and a property outside the mapped area at the last purchase can be inside it now.
General liability
Commercial general liability at $1MM per occurrence and $2MM aggregate per location.
"Per location" is doing work. If you own several properties on one shared liability policy with a single $2MM aggregate spread across all of them, that does not meet the requirement — the aggregate has to apply per location. Agents handle this with a per-location aggregate endorsement, which is routine, inexpensive, and routinely forgotten.
Loss payee, mortgagee and additional insured
The lender has to appear on the policies in three distinct capacities, and each one has to be right:
- Mortgagee — with a Lender's Loss Payable Endorsement or its equivalent
- Loss Payee on the property coverage
- Additional Insured in connection with all commercial general liability lines of coverage, naming the certificate holder in the exact form we provide
The certificate holder name and address, the "I.S.A.O.A., A.T.I.M.A." language, and the loan number all have to appear exactly as we issue them. We provide the wording in writing as part of the closing package. Do not have your agent reconstruct it from a prior loan or another lender's certificate. A block that is close but not exact gets rejected, and re-issuance takes carrier time you do not control.
The certificate itself
The insurance certificate must include the following:
Policy form. ACORD 28 for the property policy, ACORD 25 for all liability lines of coverage. These are different forms carrying different information, and one does not substitute for the other. Sending two ACORD 25s is the single most common certificate error on commercial files.
Named insured must be the borrower. In this program the borrower is a legal entity, and the named insured has to be that entity, spelled as it appears on title and in the loan documents. A policy in the name of the operating business, an individual principal, or a predecessor entity does not satisfy this. If ownership is moving into a newly formed entity at closing, the policy is issued in the new entity's name.
Policy term. A 12-month term per property location. Short-term or bound-to-a-date policies are not what the requirement contemplates.
Blanket policies may be allowed. Blanket coverage across multiple properties is not automatically disqualifying, but it is reviewed rather than accepted on its face.
Coverage form. Special form or all-risk coverage. Named-peril forms do not satisfy this.
Cancellation clause. Evidence from the policy or an endorsement showing 30 days for notice of cancellation and 10 days for non-payment.
Carrier rating. "B+" or better according to A.M. Best property and casualty ratings. Lloyd's of London policies are acceptable, although they carry no Best rating. If your quote came from a surplus lines or non-admitted carrier, check the Best rating before you bind — a fast disqualifier agents rarely flag on their own.
Paying for it: premium in full, no installments
The requirement is an invoice showing the premium paid in full, with all balances paid prior to or at closing. A quote is acceptable if a payment receipt is provided, or if payment is collected on the final closing or settlement statement.
Insurance will be impounded, and all premium and/or balance due must be paid at closing. No financing or installments are allowed. Premium finance arrangements — a third-party finance company pays the carrier and the borrower repays monthly — are not acceptable. If one is already set up, it has to be unwound and the premium paid outright.
The "insurance will be impounded" language here sits alongside separate escrow rules describing cases where an insurance escrow is not collected; the escrow section governs that question, and it is covered on [our page on waiving escrow on a commercial real estate loan](/blog/can-you-waive-escrow-on-a-commercial-real-estate-loan). Either way, the premium itself is paid in full at closing.
Rent loss and business income coverage
The program's insurance requirements section does not state a rent-loss or business-income coverage requirement, and it does not set a minimum period of indemnity for one.
We are not going to invent a figure. If you want loss-of-rents or business-income coverage — and for a single-tenant building, or an owner-occupied property where the business cannot operate elsewhere, there are good reasons to want it — that is a conversation with your insurance agent about your own exposure, not a threshold we impose. Ask whether your lease documents require it; commercial leases sometimes carry insurance covenants stricter than a lender's.
Condominiums
For a loan on a commercial condominium unit, the review shifts to the association. We review the condo project insurance policy to confirm the association maintains a master or blanket insurance policy with premiums paid as a common expense. Where there is a blanket or master policy in place, evidence of insurance must be provided. Escrow is not applicable in that case.
The practical task on a condo file is obtaining the association's certificate and evidence of the master policy, which usually runs through the management company. Start that request early — management companies work on their own timelines, and this is a frequent source of last-week delays.
Law and ordinance coverage
On all commercial properties, a combination of Coverage A, B and C may be required as determined by the Lender. This applies only if the property is zoned legal non-conforming.
That is a distinct requirement with its own mechanics, covered in full on [our page on ordinance and law coverage for legal non-conforming buildings](/blog/ordinance-and-law-coverage-for-legal-non-conforming-buildings). If your property is legal non-conforming, read that one before you order the binder.
The order to do this in
1. Get the flood zone determination and the appraisal. Both feed the insurance numbers.
2. Give your agent the insurable value basis you intend to use, and the loan amount.
3. Have the agent quote to the requirements above — special form, replacement cost, coinsurance at 80% or an agreed amount endorsement, deductible at or under 10% of insured value for all perils, per-location liability aggregate.
4. Confirm the carrier's A.M. Best rating before binding.
5. Request the certificate holder wording and loan number from us in writing.
6. Have the certificates issued on ACORD 28 (property) and ACORD 25 (liability), in the borrowing entity's exact name.
7. Pay the premium in full and get the paid invoice or receipt to the file.
Doing it out of order — binding first, then correcting — is where the two-week closing delays come from.
What this page does not do
This page states the insurance requirements that apply to a small balance commercial loan under our program guidelines effective 8/3/2026. It is not an approval, a quote, a rate or a commitment to lend, and nothing here is a coverage recommendation.
It does not advise you on what insurance to buy for your own protection. Policy terms, endorsement availability and pricing vary by carrier and by state. We state the lending requirement; your insurance agent determines how to meet it with the products available to you.
It does not cover ordinance and law Coverage A, B and C for legal non-conforming buildings, or the conditions under which an insurance escrow can be waived — both are covered on the linked pages above.
It does not address environmental insurance, title insurance, closing protection letters, or the recourse carve-outs in the loan documents relating to insurance proceeds. Those are separate requirements with separate mechanics.
Legal, zoning and tax questions raised by any of this — including whether your property is legal non-conforming, and what your lease documents require you to carry — belong with your attorney, your accountant or your municipality rather than with us.
Guideline SBC 08/03/2026 · Reviewed August 31, 2026
Published September 1, 2026 · Updated September 1, 2026
How to use this guide
This article is educational guidance, not an offer or commitment to lend. Rules, property facts, credit, leverage, documentation, and full underwriting still control any actual scenario.