Fannie Mae and Freddie Mac’s updated general liability (GL) insurance requirements are creating serious friction in commercial real estate transactions. With coverage requirements that often outstrip market availability, insurance brokers and real estate borrowers are now grappling with unworkable compliance burdens - and rising financial exposure.
The new standards include mandates for high-risk liability coverages such as assault and battery, sexual abuse and molestation, and habitability. But those coverages are increasingly unavailable in today’s market.
Insurers are tightening up underwriting and declining to offer those protections, even at steep premiums - and when they do offer it, coverage is often sub-limited or excluded from multifamily portfolios altogether.
“If the required coverage isn’t available - regardless of price - you may be forced to reserve or escrow $250,000 for each coverage you’re unable to secure,” said Danielle Lombardo (pictured), chair of Willis Towers Watson’s Real Estate, Hospitality and Leisure division.
“You might have an asset paying $100,000 in annual premium, then suddenly [be] forced to spend hundreds of thousands more to address a policy exclusion where coverage isn’t available. In many cases, it’s a major issue that can strip the cash flow out of a deal.”
In today’s interest rate environment, that kind of additional capital requirement is more than a speed bump - it can bring deals to a halt.
“Most assets are already cash-strapped due to rising rates and broader market pressures and simply don’t have the extra capital to cover unexpected insurance costs,” Lombardo said.
“Every dollar, every increase in expense on a real estate deal, reduces the property value by a multiple depending on the financials of the deal.”
This issue is especially acute in jurisdictions known for nuclear verdicts, like New York, Florida, Texas, and California - where insurers are increasingly exiting high-liability sectors.
“The underwriting landscape is changing quickly,” she said. “Insurers are more selective, and the affordability of coverage is deteriorating just as risks are rising.”
From a broker’s perspective, it’s not just a placement issue anymore - it’s a strategic negotiation. “There has to be a very strategic waiver process to get the lender to waive these new requirements,” Lombardo said.
“It’s about showing the lender that you’ve truly exhausted all options - and that you’re actively managing the risk through loss control, contractual risk transfer, and more. It requires a holistic narrative to help persuade the lender to ease their stance.”
For brokers, that means walking into conversations not just with quotes, but with a complete risk management narrative.
“Securing strategic waivers, demonstrating loss control, and making the case to lenders has become a core part of the job,” she said. “We’ve had success, but it’s a heavy lift—and it’s becoming the norm, not the exception.”
What’s driving this shift is a growing disconnect between lending standards and market realities. “Fannie and Freddie’s updates are the latest example of a growing disconnect between lender insurance requirements and market realities,” Lombardo said.
“Insurers are facing an explosion in litigation costs, especially around liability claims, and in response, they’re increasing rates and excluding coverages that are now being enforced by lenders.”
This widening gap puts brokers in the crossfire. They’re being asked to source coverage that often doesn’t exist—or that costs so much it destroys the economic viability of a deal.
“It’s not just a coverage issue,” Lombardo said. “These requirements can impact whether a deal gets done at all.”
If this trend continues, Lombardo warned, the impact won’t just be on premiums. It could choke new development entirely.
“At its worst, we will see a reduction in supply from a multifamily perspective, because people won't be able to build if the insurance costs are sucking all the cash flow out of the property, or if they can't get insurance to satisfy loan covenants,” she said.
So far, no other major lenders have followed Fannie Mae and Freddie Mac’s lead - but Lombardo said she suspects it’s only a matter of time.
“These are very hot off the press, newly enforced requirements,” she said. “It’ll be interesting to see how other lenders follow suit. If they follow suit - I think they will.”
What’s needed now is more collaboration between brokers, lenders and borrowers to close that gap. “Lenders want to protect the collateral - they’re not wrong for wanting robust coverage,” she said.
“But the solution can’t be pushing borrowers into requirements that simply don’t exist in the market anymore. There needs to be flexibility, or at minimum, a modernized approach that reflects today’s risk environment.”
For brokers who can adapt, the moment offers a chance to lead. But the stakes are high - and the margin for error is shrinking.
