Business Hazard Insurance for EIDL Loans: Everything to Know

By: Ben Cavallo, CIC, AAI, CISR

Together with partner Keith Signoriello, Ben Cavallo is the principal and co-owner of C&S Insurance.

What Is Hazard Insurance?

Hazard insurance (also known as Property Insurance) is a policy that protects your business property from fire, certain natural disasters, and other covered causes of loss. It can be added on or included in  insurance package policies, or serve as standalone coverage.

Do You Need Hazard Insurance?

You need hazard insurance to apply for a small business loan from the Small Business Administration (SBA). The SBA (and most lenders) want to see proof of property coverage on an insurance policy that shows that the business owns tangible assets that can be collected if they can’t pay back the loan.

For example, if a construction business wants to take out a loan for a piece of equipment and can’t pay back the loan, the lender can claim ownership of the equipment.

What Does Hazard Insurance Cover?

Hazard insurance covers direct physical damage from a range of unforeseen circumstances, including:

  • Lightning
  • Wind
  • Blizzards or hailstorms
  • Fire
  • Explosions
  • Water damage
  • Vandalism and theft
  • And more

How Much Does Hazard Insurance Cost?

The cost of hazard insurance depends on a few factors, such as:

  • The age, value, and location of the property
  • The limits and coverage options you choose
  • Type of property
  • Whether or not you choose full replacement cost or a different valuation — such as actual cash value or agreed value — which have different payouts than full replacement costs

Hazard Insurance and SBA Loans

Economic Injury Disaster Loan (EIDL)
If you have suffered substantial economic injury and are one of the following types of businesses located in a declared disaster area, you may be eligible for an SBA Economic Injury Disaster Loan (EIDL):

  • Small business
  • Small agricultural cooperative
  • Most private nonprofit organizations

The SBA can provide up to $2 million to help meet financial obligations and operating expenses that could have been met had the disaster not occurred. Your loan amount will be based on your actual economic injury and your company’s financial needs, regardless of whether the business suffered any property damage.

Why Does the SBA Require Hazard Insurance for EIDL Loans?

The SBA requires hazard insurance for certain EIDL loans to protect their own loan collateral. It’s a last resort option — other insurance policies should be sufficient.

Hazard insurance is required for loans over $25,000, with real estate being the preferred collateral. Loans of $200,000 or less do not require the owner of the business to use their primary residence as collateral if it is determined the owner has other assets of equal quality and a value equal to or greater than the amount of the loan.

Furthermore, business property insurance on a building or business personal property may also be used as collateral.

Minimum Coverage for SBA Disaster Loans

The minimum amount of coverage for SBA disaster loans must equal at least 80% of your loan amount. The insurance must be under the name of your business (and you must prove you own business property). If you operate under a DBA (doing business as) it must be listed on the insurance policy.

Home-Based Businesses

Since a homeowners insurance policy may not be sufficient to cover your business assets, home-based businesses may need a business hazard insurance policy in order to be eligible for an EIDL loan. Your SBA loan officer should be able to assist you with determining whether you need additional hazard insurance.

Why C&S Insurance?

We have access to a variety of markets that provide coverage options and competitive rates to our customers. Our agents have experience with property insurance and are familiar with the coverage terms on the various coverage forms. We can secure you coverage that is both extensive and affordable. We’re also able to provide the SBA loan officers with the information and documentation they need to streamline the process.

Frequently Asked Questions

Q: What is hazard insurance?
A: Hazard insurance is a type of coverage required for an SBA loan. Hazard insurance protects your business property from fire, natural disasters, and other covered causes of loss.

Q: Do I need hazard insurance?
A: You need hazard insurance if you are applying for a small business loan.

Q: How do I know if I already have hazard insurance? 
A: It should be in your policy coverage, but it’s a good idea to reach out to your agent to confirm. You can ask what limits the coverage has, and make sure it covers everything the loan requires.

Q: What does hazard insurance cover? 
A: Hazard insurance can cover damages from lightning, wind, storms, fire, explosions, vandalism and theft, and more.

Q: Can you have hazard insurance if you don’t own commercial property and work out of your home?
A: Yes, hazard insurance covers personal assets that can be used for collateral for SBA loans.

Q: What limit of hazard insurance do I need? 
A: To calculate what limit of hazard insurance you need, have your assets and finances assessed. Our experienced agents at C&S can help you determine the value of your assets and recommend a coverage amount. Although the SBA only requires up to 80% of business coverage, we recommend to insure 100%. That way, if there’s an accident, you’ll get the whole amount of what you lost.

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