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How to negotiate property insurance with lenders

Matt Harrell


“No surprises” is the mantra many of our clients strive to live by when at the closing table. Unfortunately, this was not the case as we recently worked through the insurance requirements related to the closing of an apartment community here in Florida. 

After speaking with multiple insurance providers, we were finally able to get the insurance cost to within our client’s budget; however, we had not factored in what soon became a major obstacle: the bank, or “lender,” was requiring full limits for flood insurance. 

Because most insurance providers do not offer “excess flood,” buying this type of coverage to meet this requirement is extremely costly, which put our client’s ability to close on the property in jeopardy.

Thankfully, the situation was worked out through our ability to negotiate with the bank. In this environment, being able to negotiate with lenders on their insurance requirements can sometimes make or break a deal. 

Negotiation through justification

The negotiating process begins with familiarizing yourself with the lender’s insurance requirements thoroughly. Next, analyze the property’s risk exposure and how it compares to the lender’s requirements. Then, for coverage or limits that you deem unnecessary, provide justification that will allow the lender to waive or alter the initial requirements.

Three insurance requirements that may be worth paying attention to, as you consider potentially requesting changes include: 

1. Flood insurance

In the case of our client mentioned above, we determined the need for full flood coverage to be unnecessary - so we requested a waiver in order to get the pricing back down to within our client’s budget. But how did we prove how much flood insurance was really needed? 

Catastrophe models - or “cat models” - are used to scientifically project the potential loss a property will experience in the event of a hurricane and storm surge. It is a complicated formula that takes into consideration many criteria - from a building’s construction to its proximity to water - and simulates thousand of weather scenarios. 

After conducting this model, we were able to demonstrate to the lender the likelihood of a total loss from flood was virtually impossible. In the end, the lender agreed to waive their requirement for full flood coverage, which reduced our client’s insurance cost to a level that allowed the deal to close.  

2. Ordinance and Law insurance

Ordinance and Law coverage comes into play when a property suffers a loss where 50% or more of a building is damaged and the local ordinance requires the owner to tear down the entire building. This insurance covers the value of the undamaged building, the cost to remove the undamaged portion of the building, and the increased cost of construction to comply with current-day building codes.

While this is very good and important coverage, your property may not realistically need coverage at the limits stipulated by the lender. For example, things to take into consideration include the existence of firewalls, fire suppression systems, number of buildings, separate between buildings, and the proximity to a fire station. Assessing these factors may help build a case that ordinance and law coverage limits could be lowered.

3. Insurable replacement cost

Typically, loan documents require a property to be insured to 100% of the insurable replacement cost value. That means if a property is damaged beyond repair, 100% of the costs to replace the property will be covered. 

The replacement costs are determined by an appraisal. If the replacement cost value you’re currently using is based on an old appraisal, it may be worth investing in a new appraisal as construction costs have decreased in recent years. Lowering the lender’s required insurable replacement cost should lower your premiums.

In conclusion

After showing the lender the catastrophe model and negotiating with them, they granted a waiver that exempted our client from paying for excess flood insurance, bringing the insurance costs down so that the deal could close.

Negotiating with lenders on insurance requirements may not always have such a dramatic impact as it did in our client’s case, but ensuring you’re only paying for the insurance coverage you need is always an effective way to help keep real estate costs down. The key is to provide the justification lenders need in order to approve changes in their insurance requirements.

Matt Harrell ( is managing director of Franklin Street’s Insurance Services Division.


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