Earthquake insurance on California CRE loans is typically required when the third-party probable maximum loss (PML) study exceeds 20% scenario expected loss (SEL) . Below 20%, coverage is usually waived; above 20% to 25% PML, lenders require coverage at limits sized to the PML or a sponsor seismic-retrofit plan with funded reserves .
How PML drives earthquake insurance and lender treatment
California (and other seismic-zone) lenders rely on a probable maximum loss (PML) study from a qualified seismic engineer, typically delivered as a scenario expected loss (SEL) percentage and a 475-year probable maximum loss percentage. The 20% SEL threshold is an industry rule of thumb (not a regulation) for when earthquake coverage becomes a financing requirement.
Below 20% SEL: most CMBS, agency, and life-co lenders waive earthquake coverage. Bank and debt-fund treatment varies; some require coverage above 15% SEL on stabilized CMBS-eligible assets. Cost benefit at this threshold often does not justify the premium.
Above 20% to 25% SEL: lenders require earthquake coverage at limits sized to the PML scenario (often 12 to 18 months business interruption included), a seismic-retrofit plan with funded reserves, or a combination. California earthquake coverage for commercial property comes from specialty and surplus-lines markets; the California Earthquake Authority (CEA) covers residential only.
PML methodology and reporting standards changed materially after the ASCE / SEAONC California Existing Building Code revisions; lenders increasingly accept ASTM E2026-style scenario reports with both SEL and SUL (scenario upper loss) figures. Engage a seismic engineer before LOI on any non-trivial California asset.
Sources
- California FAIR Plan Association: Commercial Coverage and Wildfire Risk · California Department of Insurance · 2025
- Capital Markets Special Report: Insurance Industry CRE Mortgage Holdings · National Association of Insurance Commissioners (NAIC) · 2025-Q4
- Risk Management & Insurance Industry Benchmark Survey · Risk and Insurance Management Society (RIMS) · 2025