HUD 232 Insurance Requirements
Below is an outline of insurance requirements for HUD 232 financing. HUD’s detailed requirements for insurance on Section 232 loans are found in Chapter 14 of the Healthcare Mortgage Insurance Program Handbook (4232.1).
Each property must be covered by property and liability insurance for the duration of the loan. The first year’s premiums must be paid in full at closing. In addition, borrowers must provide their lenders with evidence of insurance on or before the closing date or before the policy’s renewal date.
Property Insurance Requirements
HUD requires all property types to have the following property insurance:
The policy must cover 90% of the property’s estimated replacement cost and must be free from coinsurance.
The maximum deductible must be:
$25,000 per occurrence “for a portfolio (aka blanket) or single asset mortgage loan with a property having less than or equal to $100 million in total replacement values, as listed in the policy.”
1% or $250,000 per occurrence “for a portfolio or single asset mortgage loans with a property having greater than or equal to $100 million in total replacement values, as listed in the policy.”
HUD requires each borrower and each property to have liability insurance for the life of the loan. For new construction or substantial rehabilitation, HUD requires both the general contractors and borrowers to be covered by Commercial General Liability Insurance. Below is the required minimum coverage:
Primary coverage - Minimum $1 million per occurrence/$3 million per location
Minimum Umbrella Liability Insurance (above primary coverage) - An additional $5 million; required for 10 or more facilities
The maximum deductibles must be:
$25,000 deductible/SIR (self-insured retention) for portfolio and/or single asset mortgages with properties less than or equal to $100 million in total replacement values.
$100,000 deductible/SIR for portfolios and/or single asset mortgages with properties greater than or equal to $100 million in total replacement values.
Other Types of Insurance
Depending on their location, some properties may also require Earthquake Insurance, Flood Insurance, and/ or Sinkhole/Mine Subsidence Insurance.
PLI (Professional Liability Insurance)
Because of the nature of care provided in skilled nursing and other senior living facilities, HUD requires PLI (Professional Liability Insurance) for healthcare facilities insured under FHA Section 232. The state-licensed Operator of the residential care facility or the entity responsible for its day-to-day operation must have PLI subject to HUD guidelines.
Insurance Upon Completion (IUC)
One option available for HUD 232 financing for new construction and substantial rehabilitation projects is IUC or Insurance Upon Completion. Unlike other FHA 232 projects, with IUC, there is no closing before construction begins. In contrast, closing takes place after construction and cost certification. IUC projects are subject to full underwriting review by OCRF. Construction may only begin after Firm Commitment is issued.