SBA rules · SOP 50 10 8.1
What insurance does an SBA loan require?
SBA requires hazard, flood, life, and marine insurance under specific collateral and borrower conditions, as well as builder's risk and worker's compensation insurance for certain construction projects.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Hazard insurance: Required on all collateral assets for 7(a) loans and 504 projects over $50,000 at full replacement cost, plus separate policies for state-mandated perils like wind, hail, or earthquake. Under SOP 50 10 8.1, coverage is not required for loans of $500,000 or less if total business assets have a replacement value of $50,000 or less, or for junior-lien residential real estate when insurance cannot be obtained.
- Flood insurance: Mandatory whenever collateral real estate, or personal property collateral housed inside it, is located in a special flood hazard area, up to the lesser of the outstanding loan balance or the maximum available under the National Flood Insurance Program.
- Life insurance: Required in the amount of the collateral shortfall for principals of sole proprietorships, single-member LLCs, or businesses dependent on one owner's active participation when a Standard 7(a) or 504 loan is not fully collateralized. Lenders of 7(a) Small, SBA Express, and Export Express loans may follow their internal written policies for similarly sized non-SBA commercial loans.
- Marine insurance: Required when a vessel serves as loan collateral, covering full insurable value with the lender or CDC/SBA named as mortgagee, and must include protection and indemnity, breach of warranty, and pollution coverage.
- Construction insurance: For construction contracts exceeding $350,000 in 7(a), or where interim financing is involved in 504, the contractor must carry builder's risk and worker's compensation insurance unless an approved construction management waiver applies.
The source
What the SOP says
“For 7(a) loans greater than $50,000, and for 504 projects greater than $50,000, SBA requires hazard insurance on all assets pledged as collateral.
“The Borrower must also maintain a separate policy if the business is located in a state that requires additional coverage such as wind, hail, earthquake, or other.
“For loans of $500,000 or less, if residential real estate is pledged as collateral and the lien will not be in first position, and if hazard insurance cannot be obtained, then it is not required on the residential real estate;
“If any portion of a building that is collateral for the loan is located in a special flood hazard area, the SBA Lender must require the Applicant to obtain flood insurance for the building under the NFIP or comparable private flood insurance (see Subparagraph b above).
“If the loan is not fully secured, life insurance is required in the amount of the collateral shortfall for the principals of sole proprietorships, single member LLCs, or for businesses otherwise dependent on one owner’s active participation.
“When a vessel(s) is(are) the collateral on the loan, SBA Lender must obtain coverage in the amount of the full insurable value on the vessel(s) with the 7(a) Lender (for 7(a)), or the CDC/SBA (for 504), designated as “Mortgagee”.
“Evidence that the licensed contractor has furnished a l00% performance bond and labor and materials payment bond and that the contractor carries appropriate Builder’s Risk and Worker’s Compensation Insurance;
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Related reading
This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.