Source for reasonable earthquake insurance? Plus a cautionary tale...

[Scott Price]

Hi, first a request: Do you know of a reasonably priced earthquake insurance provider (that covers Washington state)?

Second, a cautionary tale: I have owned a 29 unit apartment complex for 9 years, always paying the mortgage faithfully and at a high interest rate (what were current rates at the time) that the lender should be quite happy with nowadays.  Over those 9 years, the note was sold once and then sold a second time.  The new note holder, a large firm out of Dallas, recently and totally unexpectedly gave one month notice that they require my property to have earthquake insurance.  I have asked multiple highly experienced investors, brokers, lenders, and even 6 seismology experts in the area if they had ever heard of a lender requiring earthquake insurance for the entire area north of Seattle.  Literally none had ever heard of this situation.  The seismology experts had never heard of the note holder's classification system.  Everyone has been flabbergasted.  The additional insurance cost is more than the positive cash flow of the property, but this new note holder doesn't care.  When asked multiple times what is the basis of their policy, why they are forcing implementation of something no other reputable lender requires for the area, and other related questions, they repeatedly decline to answer except to circularly say it is their new policy.  Although the loan documents definitely do not require earthquake insurance, the note holder is using a vague "weasel clause" that says "Borrower shall keep the improvements now existing or hereafter erected on the Property insured by carriers at all times satisfactory to Lender against loss by fire, hazards included within the term "extended coverage", rent loss and such other hazards, casualties, liabilities and contingencies as Lender shall require and in such amounts and for such periods as Lender shall require."

So, the cautionary tale here is that those vague weasel clauses that are prevalent throughout lender-favored loan documents can come back to bite you in a big way, especially when in the hands of a note holder blazing a new path that nobody else agrees with but they have the weasel-clause-endorsed right to do so.

I will need to look hard into refinancing. Although the property cash flows, the market price has unfortunately declined for local tertiary market reasons and it will require a large out of pocket amount to get back to a LTV ratio for regular financing again (currently at about 86% LTV). The out of pocket down payment expense is the bigger concern about getting away from under this rogue note holder.

Any ideas on this unprecedented situation would be appreciated as well.

Thank you.

[Bob E.]

My guess is that the new Note Holder bought at a discount and is looking to force you to Refi so they can recapture their discount.  

Here are a few options:

1)  Get the insurance.

2)  You could consult a lawyer.  I would think that if you have had this not for 9 years and the issue has not been raised then you could make an argument that it is not required and by not enforcing it the prior lender waived the right to require it.

3)  Offer to buy out their note at a discount, remember they probably bought it at less then face value, then refi the lower amount and hope you get a lower rate AND don't have to put cash into the deal.