Premium Financing to the Rescue

Help available. Property insurance costs are rising, and what makes the situation especially challenging is that the bill usually needs to be paid in one fell swoop. And with rising premium costs, boards are now finding themselves in even more of a pinch. But they can ease the pain by taking advantage of insurance premium financing, which will allow them to make small monthly payments instead of paying one lump sum. 

Keeping it simple. Insurance premium financing is 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. Because lenders do not look at the building’s financials and 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 — which can be turned around in as little as two weeks — that is signed by the board and the broker. The building 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 9%,” says Thomas Sussewell, the president of Goldin Choice Management. “But that 9% 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 $3,100, or less than 4%. That’s what makes insurance premium financing affordable and beneficial to buildings.”

All covered. 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.”

Up and up. With insurance premiums higher than they have been in years, Stern has seen an uptick in borrowing 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. “If it’s feasible, boards should consider increasing the amount of their down payment,” says Jason Schiciano, the co-president of Levitt-Fuirst Associates insurance brokerage. “A higher down payment will reduce the amount of interest paid over the term of the loan.” 

Win-win. 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.”