Fannie Mae and Freddie Mac have recently updated their general liability insurance requirements, and this change is causing significant challenges in the commercial real estate market. The new rules demand coverage that is often hard to find, leaving insurance brokers and real estate borrowers struggling to meet these requirements while also facing increased financial risks.
The updated standards include high-risk liability coverages like assault and battery, sexual abuse, and habitability. However, these types of coverage are becoming increasingly scarce in the current market. Insurers are tightening their underwriting processes and are often unwilling to provide these protections, even at high premiums. When coverage is available, it frequently comes with limitations or is excluded from multifamily properties entirely.
Danielle Lombardo, chair of Willis Towers Watson’s Real Estate, Hospitality and Leisure division, highlighted the issue, stating that if required coverage cannot be secured, borrowers might have to set aside or reserve $250,000 for each type of coverage they can’t obtain. This added financial burden can severely impact cash flow, especially for properties already paying substantial premiums.
In today’s environment of rising interest rates, these unexpected costs can halt real estate deals. Many properties are already cash-strapped due to market pressures, leaving little room for additional expenses. Lombardo pointed out that any increase in costs can significantly lower a property’s value, making it harder to secure financing.
This problem is particularly pronounced in states known for high liability claims, such as New York, Florida, Texas, and California. Insurers are increasingly withdrawing from these high-risk areas, further complicating the situation for brokers and borrowers. Lombardo noted that the underwriting landscape is shifting quickly, with insurers becoming more selective and the affordability of coverage decreasing as risks rise.
For brokers, this situation has moved beyond merely finding coverage. They now need to engage in strategic negotiations with lenders. Lombardo emphasized the importance of demonstrating that all options have been exhausted and that risks are being actively managed. This requires a comprehensive approach to risk management, which brokers must communicate effectively to lenders.
The disconnect between lender requirements and what is realistically available in the market is widening. While lenders want to protect their investments, the current insurance landscape makes it increasingly difficult for borrowers to comply with these demands. Lombardo warned that if this trend continues, it could stifle new developments in the multifamily sector, as high insurance costs could drain cash flow and make projects unviable.
So far, other major lenders have not adopted similar requirements to those of Fannie Mae and Freddie Mac, but Lombardo believes it may only be a matter of time. She urged for more collaboration among brokers, lenders, and borrowers to address this gap. The goal should be to find flexible solutions that reflect the realities of today’s risk environment, rather than imposing requirements that are no longer feasible.
For brokers who can adapt to these changes, there is an opportunity to lead in this challenging market. However, the stakes are high, and the margin for error is narrowing.