Link to an amendment published at 91 FR 20867, Apr. 20, 2026.

1. (a) General. Borrowers must purchase and maintain property insurance on all buildings included as security for an Agency loan. Also, borrowers must furnish fidelity coverage, liability insurance, and any other insurance coverage required by the Agency in accordance with this paragraph to protect the security of the asset. Failure to maintain adequate insurance coverage or pay taxes may lead to a non-monetary default under § 3560.452(c).

2. (b) General insurance requirements. All insurance policies must meet the requirements established by the loan documents and this section.

   1. (1) On or prior to the date of loan or grant closing, applicants must provide documentary evidence that insurance requirements have been met. The borrower must maintain insurance in accordance with the requirements of their loan or grant documents and this section until the loan is repaid or the terms of the grant expire. If interim financing is obtained or the Agency provides for multiple advances for construction or rehabilitation, evidence of builder's risk insurance is required prior to the start of construction or rehabilitation.
   2. (2) Insurance companies must meet the requirements of paragraph (e) of this section.
   3. (3) Insurance coverage amount, terms, and conditions must meet the requirements of paragraph (f) of this section.
   4. (4) The Agency must be named as loss co-payee or mortgagee as it appears on all property insurance policies.

3. (c) Borrower failure or inability to meet insurance requirements. The Agency will take the following actions in cases where a borrower is unwilling or unable to meet the Agency's insurance requirements:

   1. (1) The Agency will obtain insurance for Agency financed property if the borrower fails to do so. If borrowers refuse to pay the insurance premium, the Agency will pay the insurance premium and charge the premium payment amount to the borrower's Agency account and will place the borrower in default as described in § 3560.452(c).
   2. (2) If borrowers habitually fail to pay premiums in a timely manner, the Agency will require borrowers to escrow amounts appropriate to pay insurance premiums.
   3. (3) If insurance that meets the Agency's specified requirements is not available (e.g., flood or hurricane insurance), the Agency may accept the insurance policy that most nearly conforms to established requirements.
   4. (4) If the best insurance policy a borrower can obtain at the time the borrower receives the loan or grant contains a loss deductible clause greater than that allowed by paragraph (f)(9) of this section, the insurance policy and an explanation of the reasons why more adequate insurance is not available must be submitted to the Agency for approval prior to the date of loan or grant closing.
4. (d) Credits, refunds, or rebates. Borrowers must credit any refund or rebate from an insurance company to the project's general operating account or reserve account.

5. (e) Insurance company requirements. All insurers, insurance agents, and brokers must meet the following requirements:

   1. (1) Be licensed or authorized to do business in the state or jurisdiction where the housing project is located; and
   2. (2) Be deemed reputable and financially sound as determined by the Agency.

6. (f) Property insurance. The following conditions apply to property insurance purchased for Agency-financed housing projects.

   1. (1) At a minimum, borrowers must obtain the following types of property insurance:

      1. (i) Hazard insurance. A policy which generally covers loss or damage by fire, smoke, lightning, windstorms, hail, explosion, riot, civil commotion, aircraft, and vehicles. These policies may also be known as “Property Insurance,” “Fire and Extended Coverage,” “Homeowners,” “All Physical Loss,” or “Broad Form” policies.
      2. (ii) Flood insurance. This coverage is required for properties located in Special Flood Hazard Areas (SFHA) as defined in 44 CFR part 65, as determined by the Federal Emergency Management Agency (FEMA).
      3. (iii) Builder's risk insurance. A policy that insures 100 percent of the estimated cost value of the project under construction or rehabilitation, or applicable State required coverage limits, if more stringent.
      4. (iv) Elevators, boiler, and machinery coverage. This coverage is required for properties that operate elevators, steam boilers, turbines, engines, or other pressure vessels.
      5. (v) Business income loss. Business income or rent loss coverage provides coverage for the loss of rental income incurred due to a property loss during a 12-month period.

   2. (2) Other types of insurance that the Agency may require:

      1. (i) Windstorm Coverage if specifically excluded from the All-Risk policy.
      2. (ii) Earthquake Coverage.
      3. (iii) Sinkhole Insurance or Mine Subsidence Insurance.

   3. (3) For property insurance, the minimum coverage amount must equal the “Total Estimated Reproduction Cost of New Improvements,” as reflected in the housing project's most recent appraisal. At a minimum, property insurance coverage must not be less than 80 percent of the insurable replacement cost value, unless such coverage is financially unfeasible for the housing project, as determined by the Agency.

      1. (i) If the cost of the minimum level of property insurance coverage exceeds what the housing project can reasonably afford, the borrower, with Agency concurrence, must obtain the maximum amount of property insurance coverage that the housing project can afford.
      2. (ii) When required by paragraph (f)(1) of this section, the coverage amount for flood insurance must not be less than 80 percent of the insurable replacement value, or the maximum amount of insurance available with respect to the project under the National Flood Insurance Act, whichever is less. The policy shall show the Owner as insured and shall show loss, if any, payable to the United States of America acting through the Rural Housing Service or its successor agency.
   4. (4) Except for flood insurance, property insurance is not required if the housing project is in a condition which the Agency determines makes insurance coverage not economical.
   5. (5) Policies for several buildings or properties located on noncontiguous sites are acceptable if the insurer provides proof that each secured building or property related to the housing project is as fully protected as if a separate policy were issued.
   6. (6) Borrowers must notify the Agency and their insurance company agents of any loss or damage to insured property and collect the amount of the loss.

   7. (7) When the Agency is in the first lien position and an insurance settlement represents a satisfactory adjustment of a loss, the insurance settlement will be deposited in the housing project's general operating account unless the settlement exceeds $5,000. If the settlement exceeds $5,000, the funds will be placed in the reserve account or other supervised account for the housing project.

      1. (i) Insurance settlement funds which remain after all repairs, replacements, and other authorized disbursements have been made retain their status as housing project funds.
      2. (ii) If the indebtedness secured by the insured property has been paid in full or the insurance settlement is in payment for loss of property on which the Agency has no claim; a loss draft which includes the Agency as co-payee may be endorsed by the Agency without recourse and delivered to the borrower.

      3. (iii) The Agency will apply the insurance proceeds to the Agency debt when the following occurs:

         1. (A) The Agency is in the first lien position;
         2. (B) The multifamily housing property has been deemed a total loss by the insurance company, such as a catastrophic event beyond the Borrower's control;
         3. (C) All units are vacant and non-habitable; and
         4. (D) The tenants who occupied the property at the time of the catastrophic event have been relocated to other housing units under the Agency's disaster procedure process.
   8. (8) When the Agency is not in the first lien position and the insurance settlement represents satisfactory adjustment of the loss, the Agency will release the settlement funds to the primary mortgagee upon agreement of all parties to the provisions contained in agreements between the Agency and the primary lienholder.

   9. (9) Allowable deductible amounts are as follows:

      1. (i) Hazard/property insurance.

         1. (A) For a project with less than or equal to $1,000,000 of coverage, no deductible greater than $10,000 per occurrence.
         2. (B) For a project with more than $1,000,000 but less than or equal to $2,000,000 of coverage, no deductible greater than $25,000 per occurrence.
         3. (C) For a project with more than $2,000,000 of coverage, no deductible greater than $50,000 per occurrence.
      2. (ii) Flood Insurance. The Agency allows a maximum deductible of $5,000 per building.
      3. (iii) Windstorm Coverage. When windstorm coverage is excluded from the “All Risk” policy, the deductible must not exceed five percent of the total insured value.
      4. (iv) Earthquake coverage. If the borrower obtains earthquake coverage, the Agency is to be named as a loss payee. The deductible should be no more than 20 percent of the coverage amount.
      5. (v) Sinkhole Insurance or Mine Subsidence Insurance. The deductible for sinkhole insurance or mine subsidence insurance should be similar to what would be required for earthquake insurance.
   10. (10) Deductible amounts (excluding flood, windstorm, earthquake and sinkhole insurance, or mine subsidence insurance) must be accounted for in the replacement reserve account, unless the deductible does not exceed the maximum deductible allowable as indicated in paragraph (f)(9)(i) of this section. Borrowers who wish to increase the deductible amount must deposit an additional amount to the reserve account equal to the difference between the Agency's maximum deductible and the requested new deductible. The Borrower will be required to maintain this additional amount so long as the higher deductible is in force.

   11. (11) Each policy shall meet the following requirements:

       1. (i) Policy may not be cancelled or modified without at least thirty (30) days prior written notice to the Agency (the clause shall not state that the insurer will “endeavor” to send such notice or that no liability attaches to the insurer for failure to send such notice).
       2. (ii) Policy shall provide that any loss otherwise payable thereunder shall be payable notwithstanding any act or negligence of Borrower which might, absent such agreement, result in a forfeiture of all or part of such insurance payment.
       3. (iii) Such insurance policies shall name the Owner as the Insured and shall carry a standard form of Non-Contribution Mortgage Clause showing loss or damage, if any, payable to the Owner and the “United States of America acting through the Rural Housing Service or its successor agency,” as its interest may appear.
7. (g) Liability insurance. The borrower must carry comprehensive general liability insurance with coverage amounts that meet or exceed Agency requirements. This coverage must insure all common areas, commercial space, and public ways in the security premises. Coverage may also include borrower exposure to certain risks such as errors and omissions, environmental damages, or protection against discrimination claims. The insurer's limit of liability per occurrence for personal injury, bodily injury, or property damage under the terms of coverage must be at least $1 million.

8. (h) Fidelity coverage. Borrowers must provide fidelity coverage on any personnel entrusted with the receipt, custody, and disbursement of any housing monies, securities, or readily salable property other than money or securities. Borrowers must have fidelity coverage in force as soon as there are assets within the organization and it must be obtained before any loan funds or interim financing funds are made available to the borrower. In addition, the following conditions apply to fidelity insurance:

   1. (1) Fidelity insurance coverage must be documented on a bond form acceptable to the Agency.
   2. (2) Fidelity coverage policies must declare in the insuring agreements that the insurance company will provide protection to the insured against the loss of money, securities, and property other than money and securities, through any criminal or dishonest act or acts committed by any employee, whether acting alone or in collusion with others, not to exceed the amount of indemnity stated in the declaration of coverage.
9. (i) The fidelity insurance policy, at a minimum, must include an insuring agreement that covers employee dishonesty.

10. (ii) Fidelity coverage amount and deductible as follows:

    1. (A) Coverage amount. An amount at least equal to 25 percent of the operational cash sources per the project's proposed annual budget or $50,000 whichever is greater, unless greater amounts are required by the Owner. Where the operational cash sources for a project are substantially below the minimum $50,000 bonding requirement for operation, with Agency approval, the bond may be reduced to an amount sufficient to cover at least 25 percent of the operational cash sources.
    2. (B) Deductible. No greater than $15,000 per occurrence.
    3. (3) Blanket crime insurance coverage or fidelity bonds are acceptable types of fidelity coverage.
    4. (4) At a minimum, borrowers must provide an endorsement, listing all of the borrower's Agency financed properties and their locations covered under the policy or bond as evidence of required fidelity insurance. The policy or bond may also include properties or operations other than Agency financed properties on separate endorsement listings.
    5. (5) Individual or organizational borrowers must have fidelity coverage when they have employees with access to the MFH complex assets. Borrowers who use a management agent with exclusive access to housing assets must require the agent to have fidelity coverage on all principals and employees with access to the housing assets. If active management reverts to the borrower, the borrower must obtain fidelity coverage, as a first course of business.

    6. (6) Fidelity coverage is not required under the following circumstances:

       1. (i) The borrower is an individual or a general partnership and the individual or general partner will be responsible for the financial activities of the housing project.
       2. (ii) In the case of a land trust where the beneficiary is responsible for management, the beneficiary will be treated as an individual.
       3. (iii) A limited partnership (or its general partners) unless one or more of its general partners perform financial acts within the scope of the usual duties of an “employee.”

    7. (7) The premium for fidelity coverage of employees and general partners at a housing project is an eligible operating account expense.

       1. (i) The premium of a management agent's fidelity coverage for the agent's principals and employees will be the management agent's business expense (i.e., it is included within the management fee).
       2. (ii) When a housing project employee is covered under the “umbrella” of the management agent's fidelity coverage, the premium may be prorated among the housing projects covered.

    8. (8) Borrowers must review fidelity coverage annually and adjust it as necessary to comply with the requirements of this section.

       1. (i) Workers' compensation insurance. This insurance coverage, which may also be known as employer's liability coverage, provides benefits to employees who suffer work-related injuries or illnesses. Workers' compensation insurance is required for permanent and part-time staff assigned directly to the project.

       2. (j) Taxes. The borrower is responsible for paying all taxes and assessments on a housing project before they become delinquent.

          1. (1) An exception to the above may be made if the borrower has formally contested the amount of the property assessment and escrowed the amount of taxes in question in a manner approved by the Agency.
          2. (2) Failure to pay taxes and assessments when due will be considered a default. If a borrower fails to pay outstanding taxes and assessments, the Agency will pay the outstanding balance and charge the tax or assessment amount, assessed penalties, and any additional incurred costs to the borrower's Agency account.
          3. (3) The Agency will require borrowers who have demonstrated an inability to pay taxes in a timely manner to escrow amounts sufficient to pay taxes.

[69 FR 69106, Nov. 26, 2004, as amended at 87 FR 11281, Mar. 1, 2022; 91 FR 20867, Apr. 20, 2026]