Insurance FAQ

Understanding Insurance Requirements

Everything you need to know about property insurance for your investment loanβ€”and why coverage type matters more than you might think.

Coverage Types Explained

The difference between ACV and Replacement Cost can mean tens of thousands of dollars when you file a claim.

❌ Not Recommended
Actual Cash Value (ACV)

Pays the depreciated value of damaged propertyβ€”what it's "worth today" after accounting for age, wear, and condition.

A 15-year-old roof doesn't pay out enough to install a new one. You cover the gap out of pocket.

Replacement Cost βˆ’ Depreciation = ACV Payout
βœ… Required Coverage
Replacement Cost

Pays the full cost to repair or replace with materials of similar kind and quality at today's prices.

Age doesn't matter. A 40-year-old property gets full repair coverage, same as a new build.

Current Cost to Repair/Replace = Full Payout
πŸ“Š How does depreciation actually work? β–Ό

Insurance companies calculate depreciation based on the expected useful life of each component. Common depreciation schedules:

  • Roof (asphalt shingles): 20-25 year life β†’ 4-5% depreciation per year
  • HVAC systems: 15-20 year life β†’ 5-7% per year
  • Water heater: 10-12 year life β†’ 8-10% per year
  • Carpet/flooring: 10-15 year life β†’ 7-10% per year
  • Appliances: 10-15 year life β†’ 7-10% per year
  • Kitchen cabinets: 20-25 year life β†’ 4-5% per year

In an older property, these depreciation percentages compound across multiple damaged items, creating significant gaps between what you receive and what repairs actually cost.

❓ What about co-insurance policies? β–Ό

Co-insurance requires you to maintain coverage at a specified percentage (usually 80-100%) of the property's value. If you're underinsured, you become a "co-insurer" and must share in any lossβ€”even partial claims.

Example: Property worth $500,000 with 80% co-insurance requirement. You should carry $400,000 in coverage, but only have $300,000. You suffer a $100,000 loss.

Payout calculation: ($300K Γ· $400K) Γ— $100K = $75,000
Your penalty: $25,000

Co-insurance policies are not acceptable on DSCR loans because the penalty mechanism creates unpredictable coverage gaps.

Why ACV Policies Are Problematic

Understanding the real risks for both lenders and borrowers.

🏦 Why Lenders Require Replacement Cost

The property is the loan's security. If something happens and the property can't be fully restored, the lender's collateral loses valueβ€”and so does the loan's security.

It protects loan performance. When borrowers can't afford to cover a coverage gap, repairs stall. Stalled projects mean delayed exits, carrying costs, and increased default risk.

πŸ‘€ Why Borrowers Should Want It Too

No surprise bills. A $50K claim pays out $50Kβ€”not $30K plus a $20K gap you didn't budget for.

Project continuity. Your flip or BRRRR stays on schedule even if disaster strikes. Reserves stay available for planned expenses, not emergencies.

πŸ›‘οΈ How replacement cost protects your investment β–Ό

Cash flow protection: Your operating reserves and rehab budgets stay intact for planned expensesβ€”not diverted to cover insurance shortfalls.

Faster recovery: Full payouts mean you can get contractors started immediately, minimizing downtime and lost rental income.

No cash calls: You won't need to scramble for emergency capital during a crisis when lenders may be hesitant to extend additional credit.

Exit strategy intact: Whether you're flipping, refinancing, or holding long-term, your timeline stays on track because the property can be fully restored.

πŸ’° "But ACV Premiums Are Cheaper..."

Yesβ€”typically 10-15% less. On a $200/month policy, that's $25-30/month in savings, or roughly $300-360/year. One claim on a property with older components can leave you with a $10,000-$40,000 gap. The premium savings get wiped out instantlyβ€”and then some.

What the Coverage Gap Looks Like

These scenarios show actual claim calculations using standard depreciation schedules and current repair costs.

Storm damages 12-year-old roof Common Claim
Replacement Cost
$18,000
ACV Payout
$7,200
Your Gap
$10,800
Calculation Breakdown

Roof with 20-year expected life, 12 years old = 60% depreciated. $18,000 Γ— 40% remaining value = $7,200 ACV payout.

Kitchen fire in 1985 rental property Major Loss
Repair Cost
$85,000
ACV Payout
$45,100
Your Gap
$39,900
Component-by-Component Breakdown
Cabinets (15 yrs old)
RC: $12,000 ACV: $3,600
Appliances (8 yrs old)
RC: $6,500 ACV: $2,600
Flooring (20 yrs old)
RC: $8,000 ACV: $1,600
Drywall & structural
RC: $22,000 ACV: $15,400
Electrical & plumbing
RC: $18,000 ACV: $10,800
Other repairs
RC: $18,500 ACV: $11,100
Burst pipe floods two floors Water Damage
Repair Cost
$42,000
ACV Payout
$23,100
Your Gap
$18,900
What Gets Depreciated

Flooring (hardwood, carpet, tile), drywall, baseboards, HVAC components affected by water damage, any electrical that needs replacement. In a 1995 duplex, most of these components are significantly depreciated.

⚠️ The Bottom Line

In every scenario above, replacement cost coverage would pay the full repair costβ€”$0 out of pocket. With ACV, you're betting that nothing major will happen to your property's older components. That's a risky bet on an investment property.

Coverage Requirements by Loan Type

Different loan products have specific insurance requirements. Select your loan type below.

ACV Policies
Not Accepted
Co-Insurance
Not Accepted
Min. Liability
$100,000
Rent Loss
6 Months Required
πŸ“„ Policy Type
Landlord dwelling policy only. Homeowners and second home policies are not acceptable.
🏠 Coverage Type
Replacement cost required. ACV policies, co-insurance policies, and cash value dwelling coverage are not acceptable.
πŸ’° Liability
$100,000 minimum β€” in addition to property/hazard and rent loss coverage.
πŸ“… Rent Loss
6 months of qualifying rent required. Protects cash flow if property becomes uninhabitable. Reserves may substitute by management exception only (cash-out proceeds cannot be used).
🏷️ Coverage Amount
One of: 100% insurable value with guaranteed RC or estimator β€’ UPB if β‰₯80% of replacement cost β€’ Cost new from appraisal. Florida: estimator not required if policy states coverage sufficient.
πŸ“† Effective Date
In place at disbursement, no earlier than 30 days prior.
Required Perils Coverage
Policy must include protection against these hazards
πŸ”₯ Fire
πŸ’¨ Windstorm
πŸŒ€ Hurricane
🌨️ Hail
πŸ’₯ Explosion
πŸš— Vehicle Damage
✈️ Aircraft Damage
πŸ’¨ Smoke
πŸ‘₯ Riot / Civil Commotion
Policies that limit or exclude windstorm, hurricane, hail, or other extended coverage perils are not acceptable. If exclusions exist, separate coverage must be obtained.
DSCR Policy Checklist
☐ Landlord dwelling policy (not homeowners)
☐ Replacement cost coverage (no ACV, no co-insurance)
☐ $100,000+ liability coverage
☐ 6 months rent loss coverage
☐ No exclusions for wind/hail/hurricane perils
☐ Mortgagee clause: "Lender, ISAOA"
☐ 30-day cancellation notice included
☐ Effective date within 30 days of disbursement
☐ Flood insurance (if in SFHA zone A or V)
ACV Policies
Not Accepted*
Min. Liability
$300,000
Max Deductible
5% or $10K
Rent Loss
6 Mo. (if leased)
*ACV permitted for land-value-only rehabs or when dwelling is RC but Builder's Risk is ACV
πŸ“„ Policy Type
Landlord or Builder's Risk as appropriate for project. Homeowners and second home policies are never acceptable.
🏠 Coverage Type
Replacement cost required for Bridge and standard Rehab. ACV permitted only when: rehab uses land value only (no existing structure), OR dwelling policy is RC but Builder's Risk is ACV.
πŸ’° Liability
$300,000 minimum for Bridge and Rehab loans.
🏷️ Coverage Amount
Lesser of: replacement cost (accounting for expansion/change of use) OR full loan amount.
πŸ”’ Deductible
Cannot exceed lesser of 5% of coverage OR $10,000 per occurrence.
πŸ’³ Premium
Rehab: Paid in full for lesser of 1 year or loan term. Refinance: Prepaid at least 3 months from closing.
πŸ“… Rent Loss
6 months coverage if property is leased.
πŸ“† Effective Date
Within same month as loan recording.
Required Perils Coverage
Policy must include protection against these hazards β€” no exclusions permitted
πŸ”₯ Fire
πŸ’¨ Windstorm
πŸŒ€ Hurricane
🌨️ Hail
πŸ”§ Theft of Materials
πŸ’₯ Explosion
πŸš— Vehicle Damage
✈️ Aircraft Damage
πŸ’¨ Smoke
πŸ‘₯ Riot / Civil Commotion
Theft of Materials coverage is especially critical for rehab projects. If any exclusions exist, borrower must obtain separate policy/endorsement or state insurance pool coverage.
Fix & Flip / Bridge Policy Checklist
☐ Landlord or Builder's Risk policy
☐ Replacement cost (unless ACV exception applies)
☐ $300,000+ liability coverage
☐ Deductible ≀ 5% or $10,000
☐ No exclusions for wind/hail/hurricane/theft
☐ Premium prepaid per guidelines
☐ Mortgagee clause: "Lender, ISAOA"
☐ 30-day cancellation notice included
☐ 6 months rent loss (if leased)
☐ Flood insurance (if in SFHA zone A or V)
ACV Policies
Accepted
Min. Liability
$1,000,000
Policy Deferral
Until 1st Draw
Policy Type
Builder's Risk
πŸ“„ Policy Type
Builder's Risk policy appropriate for ground-up construction.
🏠 Coverage Type
Replacement Cost OR Actual Cash Value β€” both acceptable. Since there's no existing structure to depreciate, ACV and RC payouts are typically similar for GUC.
πŸ’° Liability
$1,000,000 required β€” higher than Bridge/Rehab due to increased risk on active construction sites.
πŸ”§ Deferral Option
May defer binding policy until first draw. Requirements: Quote/pro-forma dec page in file; insurance must be in place prior to first draw.
Required Perils Coverage
Builder's Risk policy must include protection against these hazards
πŸ”₯ Fire
πŸ’¨ Windstorm
πŸŒ€ Hurricane
🌨️ Hail
πŸ”§ Theft of Materials
πŸ’₯ Explosion
πŸš— Vehicle Damage
✈️ Aircraft Damage
πŸ’¨ Smoke
πŸ‘₯ Riot / Civil Commotion
Theft of Materials coverage is critical for construction sites. If any exclusions exist, borrower must obtain separate policy/endorsement or state insurance pool coverage.
Ground Up Construction Policy Checklist
☐ Builder's Risk policy
☐ RC or ACV coverage (both accepted)
☐ $1,000,000 liability coverage
☐ No exclusions for wind/hail/hurricane/theft
☐ Quote/dec page in file (if deferring)
☐ Policy bound prior to first draw
☐ Mortgagee clause: "Lender, ISAOA"
☐ 30-day cancellation notice included
☐ Flood insurance (if in SFHA zone A or V)
🏒 Condominium Requirements

Condominiums require multiple layers of coverage. The HOA must have an adequate master insurance policy for the building, walls-in coverage for the interior, liability for common areas, and fidelity coverage for the HOA.

Flood Insurance Requirements

Flood insurance is required when properties are located in designated flood hazard areas.

When Required
Special Flood Hazard Areas

Required if any part of the principal structure is in an SFHAβ€”any flood zone starting with "A" or "V".

Also required for properties in Coastal Barrier Resources System (CBRS) or Otherwise Protected Areas (OPA).

Acceptable Policies
NFIP or Private

NFIP: Standard policy issued under the National Flood Insurance Program.

Private: Acceptable if terms and coverage amount are at least equal to NFIP based on full policy review.

🏠 Structure location rules (when is coverage required?) β–Ό
Scenario Flood Insurance
Any part of principal structure in SFHA Required
Principal NOT in SFHA, but residential detached structure IS in SFHA Required for detached structure
Principal NOT in SFHA, non-residential detached in SFHA Not required
Detached structure NOT part of loan security Not required
RTL Loans Over $250,000 in Flood Zones

For RTL properties in flood zones with loan amounts greater than $250,000, additional private market flood insurance is required beyond NFIP coverage, as allowed by law.

πŸ”§ Builder's Risk flood deferral option β–Ό

For rehabs underwritten using land value only (without consideration of existing structure) and Ground Up Construction, flood policies may defer binding until the first draw is to be completed.

Requirements:

  • Insurance quote/pro-forma declaration page must be in the file
  • Insurance must be in place prior to first draw
⚠️ Forced Place Insurance

If at any time a hazard or flood policy is not in force with the servicer, "Forced Place" insurance will be applied. This coverage is typically much more expensive and may provide less favorable terms.

ACV Acceptance & Policy Checklist

Use these tables and checklists to quickly verify your insurance meets requirements.

ACV Policy Acceptance by Loan Type
Loan Type / Scenario ACV Accepted?
DSCR β€” All scenarios No
Bridge β€” Standard No
Rehab β€” Existing structure has value No
Rehab β€” Land value only (no existing structure consideration) Yes
Rehab β€” Dwelling is RC, Builder's Risk is ACV Yes
Ground Up Construction Yes
Liability Minimums by Product
DSCR Loans $100,000
Bridge & Rehab $300,000
Ground Up Construction $1,000,000
βœ… Policy Review Checklist
☐ Policy type is Landlord/Builder's Risk (not Homeowners)
☐ Mortgagee clause names AHL correctly
☐ Coverage is Replacement Cost (unless ACV exception applies)
☐ Liability meets minimum for product type
☐ Rent loss = 6 months (DSCR required, RTL if leased)
☐ No excluded perils (wind, hail, hurricane, theft)
☐ 30-day cancellation notice provision included
☐ Flood insurance in place (if in SFHA/A/V zone)
☐ Address and names match title policy exactly
☐ Insurer is US domiciled, state licensed, Fannie rated
☐ Deductible ≀ 5% of coverage or $10K per occurrence (RTL)
☐ Premium prepaid per guidelines
Requirements for All Policies

Mortgagee Clause: Must name "American Heritage Lending LLC, ISAOA" with correct address

Cancellation: 30 days prior written notice to mortgagee required

Insurer: US domiciled, licensed in property state, meets Fannie Mae rating criteria

Named Insured: Must match names on title policy

Property Address: Must match title policy exactly

Forced Place: Applied automatically if policy lapses