3560.105—Insurance and taxes.
(a) General.
Borrowers must purchase and maintain property insurance on all buildings included as security for an Agency loan. Also, borrowers must furnish fidelity coverage, liability insurance, and any other insurance coverage required by the Agency in accordance with this paragraph to protect the security of the asset. Failure to maintain adequate insurance coverage or pay taxes may lead to a non-monetary default under § 3560.452(c).
(b) General insurance requirements.
All insurance policies must meet the requirements established by the loan documents and this section.
(1)
At loan closing, prior to loan approval, applicants must provide documentary evidence that insurance requirements have been met. The borrower must maintain insurance in accordance with requirements of their loan or grant documents and this section until the loan is repaid or the terms of the grant expire.
(3)
Insurance coverage amount, terms, and conditions must meet the requirements of paragraph (f) of this section.
(4)
The Agency must be named as loss co-payee on all property insurance policies where it holds first lien position. The Agency must be named as an additional insured if its lien position is other than first.
(c) Borrower failure or inability to meet insurance requirements.
The Agency will take the following actions in cases where a borrower is unwilling or unable to meet the Agency's insurance requirements:
(1)
The Agency will obtain insurance for Agency financed property if the borrower fails to do so. If borrowers refuse to pay the insurance premium, the Agency will pay the insurance premium and charge the premium payment amount to the borrower's Agency account and will place the borrower in default as described in § 3560.452(c).
(2)
If borrowers habitually fail to pay premiums in a timely manner, the Agency will require borrowers to escrow amounts appropriate to pay insurance premiums.
(3)
If insurance that meets the Agency's specified requirements is not available (e.g., flood or hurricane insurance), the Agency may accept the insurance policy that most nearly conforms to established requirements.
(4)
If the best insurance policy a borrower can obtain at the time the borrower receives the loan or grant contains a loss deductible clause greater than that allowed by paragraph (f)(8) of this section, the insurance policy and an explanation of the reasons why more adequate insurance is not available must be submitted to the Agency prior to loan or grant approval.
(d) Credits, refunds, or rebates.
Borrowers must credit any refund or rebate from an insurance company to the project's general operating account or reserve account.
(e) Insurance company requirements.
All insurers, insurance agents, and brokers must meet the following requirements:
(1)
Be licensed or authorized to do business in the state or jurisdiction where the housing project is located; and
(f) Property insurance.
The following conditions apply to property insurance purchased for Agency-financed housing projects.
(i) Hazard insurance.
A policy which generally covers loss or damage by fire, smoke, lightning, hail, explosion, riot, civil commotion, aircraft, and vehicles. These policies may also be known as “Fire and Extended Coverage,” “Homeowners,” “All Physical Loss,” or “Broad Form” policies.
(ii) Flood insurance.
This coverage is required for properties located in Special Flood Hazard Areas (SFHA) as defined in 44 CFR part 65, as determined by the Federal Emergency Management Agency (FEMA).
(iii) Builder's risk insurance.
A policy that insures dwellings under construction or rehabilitation.
(iv) Elevators, boiler, and machinery coverage.
This coverage is required for properties that operate elevators, steam boilers, turbines, engines, or other pressure vessels.
(3)
For property insurance, the minimum coverage amount must equal the “Total Estimated Reproduction Cost of New Improvements,” as reflected in the housing project's most recent appraisal. At a minimum, property insurance coverage must be adequate to cover the lesser of the depreciated replacement value of essential buildings or the unpaid balance of all secured debt, unless such coverage is financially unfeasible for the housing project.
(i)
If the cost of the minimum level of property insurance coverage exceeds what the housing project can reasonably afford, the borrower, with Agency concurrence, must obtain the maximum amount of property insurance coverage that the housing project can afford.
(ii)
If the coverage amount is less than the depreciated replacement value of all essential buildings, borrowers must obtain coverage on one or more of the most essential buildings, as determined by the Agency.
(iii)
When required, the coverage amount for flood insurance must equal the outstanding loan balance or the maximum coverage allowed by FEMA's “National Flood Insurance Program.”
(5)
Policies for several buildings or properties located on noncontiguous sites are acceptable if the insurer provides proof that each secured building or property related to the housing project is as fully protected as if a separate policy were issued.
(6)
Borrowers must notify the Agency and their insurance company agents of any loss or damage to insured property and collect the amount of the loss.
(7)
When the Agency is in the first lien position and an insurance settlement represents a satisfactory adjustment of a loss, the insurance settlement will be deposited in the housing project's general operating account unless the settlement exceeds $5,000. If the settlement exceeds $5,000, the funds will be placed in the reserve account for the housing project.
(i)
Insurance settlement funds which remain after all repairs, replacements, and other authorized disbursements have been made retain their status as housing project funds.
(ii)
If the indebtedness secured by the insured property has been paid in full or the insurance settlement is in payment for loss of property on which the Agency has no claim; a loss draft which includes the Agency as co-payee may be endorsed by the Agency without recourse and delivered to the borrower.
(8)
When the Agency is not in the first lien position and the insurance settlement represents satisfactory adjustment of the loss, the Agency will release the settlement funds to the primary mortgagee upon agreement of all parties to the provisions contained in agreements between the Agency and the primary lienholder.
(i) Hazard/Property Insurance.
(A)
$1,000 on any housing project with an insurable value under $200,000; or
(B)
One-half of one percent (0.0050) of the insurable value, up to $10,000 on housing projects with insurance values over $200,000.
(iii) Windstorm Coverage.
When windstorm coverage is excluded from the “All Risk” policy, the deductible must not exceed five percent of the total insured value.
(iv) Earthquake Coverage.
In the event that the borrower obtains earthquake coverage, the Agency is to be named as a loss payee. The deductible should be no more than 10 percent of the coverage amount.
(v) Sinkhole Insurance or Mine Subsidence Insurance.
The deductible for sinkhole insurance or mine subsidence insurance should be similar to what would be required for earthquake insurance.
(10)
Deductible amounts (excluding flood, windstorm, earthquake and sinkhole insurance or mine subsidence insurance) must be accounted for in the replacement reserve account. Borrowers who wish to increase the deductible amount must deposit an additional amount to the reserve account equal to the difference between the Agency's maximum deductible and the requested new deductible. The Borrower will be required to maintain this additional amount so long as the higher deductible is in force.
(g) Liability insurance.
The borrower must carry comprehensive general liability insurance with coverage amounts that meet or exceed Agency requirements. This coverage must insure all common areas, commercial space, and public ways in the security premises. Coverage may also include borrower exposure to certain risks such as errors and omissions, environmental damages, or protection against discrimination claims. The insurer's limit of liability per occurrence for personal injury, bodily injury, or property damage under the terms of coverage must be at least $1 million.
(h) Fidelity coverage.
Borrowers must provide fidelity coverage on any personnel entrusted with the receipt, custody, and disbursement of any housing monies, securities, or readily salable property other than money or securities. Borrowers must have fidelity coverage in force as soon as there are assets within the organization and it must be obtained before any loan funds or interim financing funds are made available to the borrower. In addition, the following conditions apply to fidelity insurance:
(2)
Fidelity coverage policies must declare in the insuring agreements that the insurance company will provide protection to the insured against the loss of money, securities, and property other than money and securities, through any criminal or dishonest act or acts committed by any employee, whether acting alone or in collusion with others, not to exceed the amount of indemnity stated in the declaration of coverage.
(i)
The fidelity insurance policy, at a minimum, must include an insuring agreement that covers employee dishonesty.
| Fidelity coverage | Deductiblelevel |
|---|---|
| Under $50,000 | $1,000 |
| In the area of $100,000 | 2,500 |
| In the area of $250,000 | 5,000 |
| In the area of $500,000 | 10,000 |
| In the area of $1,000,000 | 15,000 |
(4)
At a minimum, borrowers must provide an endorsement, listing all of the borrower's Agency financed properties and their locations covered under the policy or bond as evidence of required fidelity insurance. The policy or bond may also include properties or operations other than Agency financed properties on separate endorsement listings.
(5)
Individual or organizational borrowers must have fidelity coverage when they have employees with access to the MFH complex assets. Borrowers who use a management agent with exclusive access to housing assets must require the agent to have fidelity coverage on all principals and employees with access to the housing assets. If active management reverts to the borrower, the borrower must obtain fidelity coverage, as a first course of business.
(i)
The borrower is an individual or a general partnership and the individual or general partner will be responsible for the financial activities of the housing project.
(ii)
In the case of a land trust where the beneficiary is responsible for management, the beneficiary will be treated as an individual.
(iii)
A limited partnership (or its general partners) unless one or more of its general partners perform financial acts within the scope of the usual duties of an “employee.”
(7)
The premium for fidelity coverage of employees and general partners at a housing project is an eligible operating account expense.
(i)
The premium of a management agent's fidelity coverage for the agent's principals and employees will be the management agent's business expense (i.e., it is included within the management fee).
(ii)
When a housing project employee is covered under the “umbrella” of the management agent's fidelity coverage, the premium may be prorated among the housing projects covered.
(8)
Borrowers must review fidelity coverage annually and adjust it as necessary to comply with the requirements of this section.
(i) Taxes.
The borrower is responsible for paying all taxes and assessments on a housing project before they become delinquent.
(1)
An exception to the above may be made if the borrower has formally contested the amount of the property assessment and escrowed the amount of taxes in question in a manner approved by the Agency.
(2)
Failure to pay taxes and assessments when due will be considered a default. If a borrower fails to pay outstanding taxes and assessments, the Agency will pay the outstanding balance and charge the tax or assessment amount, assessed penalties, and any additional incurred costs to the borrower's Agency account.
(3)
The Agency will require borrowers who have demonstrated an inability to pay taxes in a timely manner to escrow amounts sufficient to pay taxes.