Hazard Insurance for EIDL Loans: Why It’s Required

When disaster strikes, the financial aftershocks can be as devastating as the event itself. For small business owners and private nonprofit organizations, the Small Business Administration (SBA) offers a critical lifeline through Economic Injury Disaster Loans (EIDL). But SBA loans come with loan requirements that can trip up unprepared business owners—one of the most significant being the mandate for hazard insurance. 

This requirement protects both you and your lender. We’ll walk you through what hazard insurance is, why the SBA requires hazard insurance to qualify for an EIDL, what it covers, and the steps to ensure your business is compliant.

What are SBA EIDL loans?

Economic Injury Disaster Loans (EIDLs) are SBA loans that provide working capital to small businesses that have suffered substantial economic injury, like a severe drop in revenue or lost income, as a result of a disaster. 

The EIDL program is open to small businesses, small agricultural cooperatives, and most private nonprofit organizations located in a declared disaster area, which is a formal designation made by the US president. The disaster area designation can be triggered by natural disasters like floods, winter storms, and wildfires, as well as by civil unrest, industrial accidents, or other events that cause economic harm.

These loans are issued by the SBA specifically to cover operating expenses that the business would have paid for if it weren’t for the disaster. Operating expenses include things like payroll, accounts payable, and other bills. They do not include repairs to or replacements for damaged property. That’s the job of physical disaster loans, another SBA loan program.

To qualify for an EIDL loan above $25,000, small businesses need to hold hazard insurance. Hazard insurance coverage protects your business personal property, like computers, inventory, equipment, and furniture, and your commercial real estate from property damage caused by a wide range of perils. These can include fire, theft, vandalism, windstorms and hail, and damage from a vehicle or aircraft.

Why does the SBA require hazard insurance for EIDL loans?

The SBA’s hazard insurance requirement for EIDL loans is related to collateral. Loans of more than $25,000 require you to pledge collateral. For a business, collateral is typically its equipment, inventory, commercial real estate, and other business assets.

Once your business assets are pledged as collateral, the SBA files a lien, known as a UCC-1, and the hazard insurance mandate kicks in. Like most lenders—whether a local credit union or a national bank—the Small Business Administration wants to protect its investment, which in this case is the collateral you pledged for the entire life of the loan. 

The EIDL loan agreement is long-term, often 30 years. The SBA needs to ensure that your collateral (the business’s physical property) is protected for the entire life of the loan.

Imagine you receive a $100,000 EIDL and use your specialized equipment valued at $150,000 as collateral. Two years later, a fire destroys your shop. Without property insurance, your equipment is gone, your business likely fails, and you have no way to repay the loan. The SBA loses that money—as do the taxpayers who fund the SBA.

With the required hazard insurance, the insurance policy provides insurance payouts to repair or replace the equipment. This allows your business to recover and continue operating, ensuring you can still pay back your SBA loan. The insurance isn’t for the disaster you’ve just experienced; the EIDL is for that. Instead, the hazard policy protects the business assets you pledged as collateral. If a new disaster occurred, such as a fire or major theft, the insurance protects both you and the SBA from a subsequent financial loss.

Hazard insurance coverage requirements for EIDL loans

Your loan agreement spells out the minimum coverage you need. When the SBA requires hazard insurance, the loan agreement will specify these requirements. Usually, the policy must cover at least 80% of the loan amount.

The SBA also requires that the insurance policy cover the business’s physical property, which includes both business personal property and owned buildings, for full replacement cost. This is different from the actual cash value, which pays you for the depreciated value of your property. Replacement cost ensures you will receive enough money to buy new, equivalent items.

The insurance policy must also list the Small Business Administration as a “loss payee” for personal property or “mortgagee” for commercial real estate. This means that if you file a claim for property damage, the insurance payouts are made to both you and the SBA. This prevents a borrower from taking the insurance check and disappearing, leaving the SBA with a defaulted loan and no collateral.

Special cases: floods and home-based businesses

There are two common scenarios where insurance requirements for EIDL loans become more specific:

• Flood insurance. Standard commercial property insurance explicitly excludes property damage from flooding. If your business property or collateral is located in a specially designated flood plain, the SBA will require flood insurance in addition to your standard business hazard insurance.

• Home-based businesses. If you run a home-based business, your homeowners insurance policy is not sufficient. A standard homeowners insurance policy has very low coverage limits for business personal property and provides no business liability insurance. The SBA requires a formal commercial property insurance policy or a business owners policy to adequately cover the business assets, even if they are located in your primary residence.

How much does hazard insurance for an EIDL loan cost? 

There is no flat fee for business hazard insurance and your premium takes into account several key factors:

• Value of your assets. This is the biggest driver. Insuring $50,000 worth of computer equipment costs less than insuring a $2 million building and all its contents.

• Location. Businesses located in areas prone to natural disasters like hurricanes or tornadoes, or in high-crime neighborhoods, will pay more than others.

• Industry. The industry is a large factor in determining your insurance premium. For example, a construction company with heavy equipment will have higher premiums than a market research consultant.

• Construction. The construction materials used in your commercial real estate also matter. A fire-resistant steel building is cheaper to insure than an old wood-frame structure.

• Coverage limits and deductibles. The minimum coverage required by the SBA will set your baseline. Choosing higher coverage or a lower deductible will increase your annual premium.

• Claims history. If your business has filed multiple property damage claims in the past, you will be seen as a higher risk and charged more.

How to get hazard insurance for an EIDL loan

1. Read your loan agreement
2. Assess your current policies
3. Contact a licensed insurance agent
4. Purchase and provide proof of insurance

Securing the right insurance for an SBA loan is a straightforward process that includes the following steps:

1. Read your loan agreement

Your EIDL loan agreement will explicitly detail all insurance requirements, including the minimum coverage amounts, what other assets must be covered, and whether you need hazard insurance, flood insurance, or both.

2. Assess your current policies

You may already have the coverage you need. If you already have business insurance policies, review your policy’s coverage limits and exclusions. A standard business hazard insurance policy may be bundled with general liability insurance into a single package called a business owner’s policy (BOP). Liability insurance, however, is different; it covers bodily injury to a third party, while hazard insurance covers your own property.

Review your policy’s coverage limits and exclusions and compare them directly against the SBA loan requirements. 

3. Contact a licensed insurance agent

An insurance agent can be your best ally in navigating the complexities of hazard insurance. Provide your agent with a copy of the SBA’s insurance requirements. The agent can then shop for policies from The Hartford, Chubb, Hiscox, or other national and regional commercial insurers to find specific coverage that meets the SBA’s requirements.

4. Purchase and provide proof of insurance

Once you select and purchase your insurance policy, provide proof to the SBA. Simply send the agency the declarations page of your policy, which summarizes your insurance coverage. You must also instruct your insurance provider to add the Small Business Administration as a loss payee or mortgagee as specified in your loan agreement.

*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.