Friends and family members often turn to me for tips and advice on anything that has to do with personal finance decisions. That includes asking for recommendations on where to get the best insurance for less. A few days ago, a close friend of mine sent me an email with a question about hazard insurance for EIDL Loans. She had recently applied for an Economic Injury Disaster Loan via the SBA website and her loan got approved. Shortly after her loan got funded, she received an email from an SBA representative with a request for her to send proof of hazard insurance covering her business. Below is the email she got from the SBA representative:
What We'll Cover
- What Is Hazard Insurance?
- What Does Hazard Insurance Cover?
- Can You Get Hazard Insurance If You Don't Own The Property?
- Why Does the SBA Require Hazard Insurance For EIDL Loans?
- Minimum Coverage for SBA Disaster Loans
- What If My Business Is Home-Based?
- Commercial Property Insurance
- The Cost of Hazard Insurance
- Where Can I Get Affordable Hazard Insurance To Meet My EIDL Requirements?
Good morning Mrs. ******
Per your Loan Authorization and Agreement, please provide the following document(s):
Please provide hazard insurance covering at least 80% of your business contents.The Borrower's name needs to be on the policy. Please email documents to this email address or fax 202-481-4481 or mail to:
U.S. Small Business Administration
Office of Processing and Disbursement
14925 Kingsport Road
Fort Worth, TX 76155
She wasn't sure what to do about that email. She’s not a homeowner, and runs her small business out of of her rental apartment. Time-sensitive requests like this from your lender can cause you a lot of headaches, especially If you aren't familiar with many of the concepts behind buying an insurance policy for your business. So I thought It’d be useful to share with our readers how I was able to guide my friend through the process of getting the right insurance to meet the SBA requirements and bring her EIDL loan into compliance. Let’s start with the basics:
What Is Hazard Insurance?
Hazard insurance usually refers to insurance that covers the structure of your home or business. It is insurance that helps you pay for repairing the damages caused by certain risks. Other types of damages to your house will be covered by other terms within your homeowners insurance policy. Lenders generally require hazard insurance at minimum before they will approve you for a loan. Sometimes people use the term hazard insurance to refer to a homeowners insurance policy. There is also a misconception that hazard insurance can be purchased separately from homeowners insurance. This is not the case if you are a homeowner. You can’t get the latter without getting the former.
What Does Hazard Insurance Cover?
As the term implies, hazard insurance will cover the property in the event of catastrophic damage or hazards. Those events may include, but are not limited to:
- Damage from lightning
- Water damage
- Civil unrest and riots
- Vandalism and theft
- Other Damage (eg: a tree crushing your roof)
Can You Get Hazard Insurance If You Don't Own The Property?
Technically no, but you can get what’s called renters' insurance, which will cover you against hazards. Sounds confusing, but that's only because people use the term hazard insurance to refer to homeowners insurance, and you can only get homeowners insurance for a property you own. In this particular case regarding my friend, the SBA had already issued her a loan, and was now requiring her to show proof of insurance covering her business assets (computers, documents, printers, etc.) from hazardous events. Renters' insurance will do just that if you get the right policy, so that's all she had to get to comply with their request. If you run a home based business from a rental property and want to get affordable renters insurance, click on the button below to see providers starting as low as $5/month.
Why Does the SBA Require Hazard Insurance For EIDL Loans?
The Small Business Administration is a lender. Just like any other lender, the SBA is trying to protect their loan's collateral from unforeseen circumstances. For this reason the Small Business Administration requires all borrowers to obtain hazard insurance within 12 months of getting approved for one of their loans. That includes all Economic Injury Disaster Loans. In addition, all borrowers are required to maintain coverage throughout the life of the loan.
Minimum Coverage for SBA Disaster Loans
To make sure you meet all of the requirements imposed by your loan agreement you should get the amount of coverage that the SBA mandates. They have posted very detailed guidelines on their website which I've taken the time to summarize for you below for your quick reference.
What If My Business Is Home-Based?
If your business is home based and you own your home, then you need to get a homeowners insurance policy. Make sure the insurance company adds the name of your business to your policy. If you are leasing the property where you live and conduct business, then you need a renter's insurance policy that will provide similar coverage against hazards. On the email above, the SBA representative is clearly stating that they want my friend's policy to cover at least 80% of her business assets. Be sure and let your insurance company know about the amount of coverage that you need in order to satisfy your loan's requirements and that they are willing to include the name of your business on your homeowners insurance or renters' insurance policies whichever applies to you situation. If they aren't willing to cover your business under the same policy, unfortunately it's time that you switch providers, or you'll have to get a separate business property insurance (BPI) policy.
Commercial Property Insurance
Also known as business property insurance (BPI), protects commercial buildings and moveable physical assets owned by your business. These kinds of insurance policies are designed for businesses operating out of commercial buildings although some companies are happy to issue you a BPI even if your business is home-based. Commercial property insurance usually provides more coverage than a simple homeowners insurance. If you already have commercial property insurance, there is a good chance that your existing policy will more than satisfy the coverage requirements by the SBA. If you operate a brick-and-mortar business, chances are that you had to get commercial property insurance just to comply with local regulations.
The Cost of Hazard Insurance
The premiums that you will pay for hazard insurance will depend on several factors, including the limits and deductibles you choose, as well as the type of coverage. One of the biggest cost factors for hazard insurance is the state you live in. Florida and Texas, for example, are among the most expensive states because they have more frequent natural disasters that destroy property; such as hurricanes and tornadoes. There is a basic formula that can help you get a rough estimate of how much hazard insurance will cost you if you are a homeowner. Multiply the purchased price of your home by 0.23% - 0.33% and that will give you a rough estimate of the annual cost for hazard insurance. If you are a renter and all you need is renters insurance, I have better news. The average cost of renters insurance in the United States is around $15 per month, according to the Insurance Information Institute
Where Can I Get Affordable Hazard Insurance To Meet My EIDL Requirements?
The best way to get a great deal on hazard insurance is to compare rates. Comparing quotes from different providers will save you time and money in finding the right policy. To quickly compare quotes of the best insurers in your area, enter your zip code and select whether you rent or own your home on the form at the top of this article. Click on the button below to get started and view rates from multiple insurance providers to find the most affordable option.
The bottom line is, there is a good chance that you already have hazard insurance if you own a brick-and-mortar business. If you have a home-based business like my friend, you just need to make sure that you get hazard coverage under your business' name. Oftentimes it doesn’t cost extra to add your business' name to your policy.