Paula Chin in Legal/Financial on November 3, 2022
A worsening squeeze. In today’s so-called “hard” insurance market, premiums continue to rise while coverage limits continue to shrink. To add to the financial pressure, insurance bills are typically paid in one lump sum. Today, though, some boards are taking advantage of a financing tool that spreads the cost of these premiums over the course of a year.
Keeping it simple. It’s called insurance premium financing, and it’s offered by a niche group of nationwide and local lenders. Typically, a board asks its insurance broker to contact the lender and apply for the loan. “Basically the only information we need is the name of the insurance company, the name of the co-op or condo, and the amount and effective date of the building’s policy,” explains Jordan Stern, the regional sales manager and a vice president at Imperial PFS, an insurance lender. Because lenders do not look at the building’s financials and because buildings with an underlying mortgage do not need approval from their bank, the financing is virtually guaranteed.
Coming to terms. The lender then produces a finance agreement that’s signed by the board and the broker. The board makes a down payment, usually 10% of the total loan amount, to the lender, who pays the remaining 90% to the insurance carrier up front. The building repays that balance, along with interest, to the lender in monthly installments, which are usually spread out over 10 months.
“With the current inflation rate, you might see a finance interest rate somewhere near 11%,” says Thomas Sussewell, the president of Goldin Choice Management. “But that 11% is only working on the principal that’s outstanding, and with the 10-month repayment period, that principal is worked down very quickly. So with a $100,000 loan, the total interest paid over the duration of the loan would be about $4,200. That’s what makes insurance premium financing affordable and beneficial to buildings.”
Cancellations are rare. As for lenders, the loans are risk-free. The finance agreement gives the lender power of attorney over the building’s insurance policy, which means that if a co-op or condo defaults on its payments, the lender can cancel the building’s insurance. The lender sends a cancellation notice to the carrier, which then returns the unused portion of the loan to the lender. “But it’s very, very rare that a policy is canceled,” Stern says. “The only time I’ve seen it happen is when a board intentionally defaulted because it wanted to get a new insurance policy.”
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Reining in interest payments. With insurance premiums higher than they have been in years, Stern has seen an uptick in insurance premium financing by co-ops and condos. But boards should brace themselves for higher costs. “In the current inflationary environment, we do anticipate interest rates increasing to keep pace,” says Chimudi Egbuna, the controller at CNYM Risk Management, a subsidiary of Goldin Choice that specializes in offering insurance premium financing. Still, there are ways to save. Adds Jason Schiciano, the co-president at Levitt-Fuirst Associates insurance brokerage: “If it’s feasible, boards should consider increasing the amount of their down payment. A higher down payment will reduce the amount of interest paid over the term of the loan.”
Smoothing out spending. Whether a building is short on cash for a lump-sum insurance payment or wants to keep money on hand for unexpected costs, there is virtually no downside to taking out this kind of financing, Sussewell says. “The benefit of smaller payments is that they even out your cash flow, which gives buildings a stronger presentation on their financial statements,” he explains. “There won’t be peaks and valleys in your spending that will beg questions from apartment buyers and their lenders, or from banks if you’re seeking a loan for the building. There’s just a smooth line.”
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