Significant changes to HUD insurance deductibles seek to address challenges in the insurance market due to weather conditions. The U.S. Department of Housing and Urban Development (HUD insurance decutibles

The agency is responding to the growing severity of weather patterns and their challenges in the insurance market. The memo states that “insurers are less willing to underwrite a casualty insurance policy” with the current $50,000 or 1% deductible with a maximum of $250,000.

New HUD insurance deductible requirements would be the greater of $50,000 or 5% of the insurable value per location. The proposed maximum is $475,000 per occurrence.

What the HUD Insurance Deductibles Mean for You

The increase in deductibles could mean more out-of-pocket costs for property owners in the event of storm damage. This change challenges smaller developers and nonprofit entities in the affordable housing sector, where financial resources are often more constrained.

Affordable housing projects with rent restrictions may find it difficult to absorb or pass on these increased costs. The higher deductibles can lead to significant financial strain. This is especially true in geographic areas prone to severe weather.

HUD Tries to Limit Borrowers’ Exposure

HUD is amending Section 3.9.2.4.A.3 of the MAP Guide to protect borrowers by capping their financial responsibilities. It will also ensure that insurance proceeds will cover significant portions of any losses. Here’s how:

Casualty Insurance Deductibles

HUD specified new limits on the casualty insurance deductibles for borrowers:

• The deductible for any insured building must not exceed the greater of $50,000 or 1% of its insurable value.
• The notice caps maximum deductible amount at $250,000.

This means if a property is insured at a value where 1% would amount to more than $250,000, the deductible is still capped at $250,000. This would limit the borrower’s exposure and potential financial burden.

Wind or Named Storm Coverage Deductibles

Separate from standard casualty insurance, HUD has set guidelines for deductibles related explicitly to wind or named storms. These are typically more damaging:

• The deductible for wind or named storm damage must not exceed $50,000 or 5% of the insurable value per location.
• The maximum deductible for such events is $475,000 per occurrence.

This adjustment is particularly relevant in areas prone to severe weather, as it ensures that borrowers are not overwhelmed by repair costs following significant storm damage.

Waivers on High Deductibles

Recognizing that certain circumstances may warrant exceptions, HUD has provided a provision for waivers:

• The Regional Director has the authority to waive the deductible requirement in cases where it exceeds 5%, but these waivers cannot exceed $1,000,000.
• Waivers higher than $1,000,000 require approval from the Director of the Office of Multifamily Production headquarters.

HUD reserves this flexibility for borrowers who demonstrate strong financial standing and substantial experience in managing multifamily HUD projects. It acknowledges that such borrowers are more likely to handle larger repair expenses and reduce the risk of unfinished repairs.

What’s Next?

We encourage property owners to review these changes closely. Assess your insurance needs and consider the potential financial impacts on your operations and communities.

For its part, HUD says it will continue to assess:

• whether this change is achieving its policy objectives,
• whether the loans insured under the policy change are furthering HUD’s core mission,
• and whether this change impacts the overall risk profile of the FHA portfolio.

If you have questions, contact Willie Fobbs III, Director, Office of Multifamily Production at Willie.Fobbs@hud.gov.