Determining Builder's Risk Coverage

Answered by:

Question:

What is the proper method for determining the correct amount of builder's risk coverage required on a real estate construction loan? I’m thinking it should be the "as-completed" appraised value, less the amount of the land, unless the loan amount is less than that. Some lenders want to take the loan amount, net out the land value and insure the loan for the balance. I think the builder's risk coverage should always cover the value of the structure or at least the loan amount. Am I correct? I have found insurance requirement guidelines by HUD for construction of residential property, but nothing as a guideline on commercial real estate construction.

Answer:

Unless you are referring specifically to the flood insurance requirements or to other specific requirements that may be imposed by secondary market investors, any required hazard insurance is not governed by any federal laws or regulations. It is an assessment of risk that must be determined by the bank to develop their own policies.

First published on BankersOnline.com 10/29/07