Prior to the collapse of the credit markets in 2007 and 2008, most lenders' requirements for proof of insurance in commercial mortgage agreements were treated as little more than a formality, real estate and insurance experts say.

Today, as the markets recover, commercial financiers are not only more comprehensive in examining applicants' property insurance programs—including natural catastrophe and terrorism coverage—but also more diligent in tracking continuous compliance with the insurance requirements in their commercial mortgage agreements.

“Historically, insurance was a speed bump in the lending process, but now it's a land mine,” said Kevin Madden, real estate practice managing director for Aon P.L.C.'s Aon Risk Solutions unit in New York. “Now that liquidity has dried up, lenders are firmly in the driver's seat, and they're able to insist on their terms.”

Because much of the information commercial lenders now request calls for more familiarity with insurance programs than typically exists at the executive level (see related story), risk management expertise has become essential to the successful execution of loan agreements, experts say.

“There's much more individualization in the requirements than there had been in the past,” said Janice Ochenkowski, managing director of global risk management at Chicago-based Jones Lang Lasalle Inc. “You can't just send a lender a blanket certificate of insurance anymore.”

For the most part, risk managers in the real estate industry have responded well to the increased responsibility in loan negotiations, though challenges still persist. Predictably, experts say, smaller, resource-squeezed companies have had a more difficult time addressing the additional workload associated with commercial real estate loans.

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“We've seen a greater impact on the owners where the person wearing the risk management hat also wears other hats within the organization, like CFO, COO, etc.,” said Mark DeLawter, the Charlotte, N.C.-based real estate and financial institutions practice leader at Zurich North America.

Regardless of staff size and capabilities, one of the more pervasive challenges facing risk managers in negotiating commercial property insurance requirements is the structure of those negotiations, experts said.

In most cases, risk managers' primary points of contact—third-party loan servicers acting on behalf of the originating lender—do not have the authority to change covenant terms or documentation requests, and might have only a working knowledge of the insurance marketplace.

While negotiating covenants for traditionally structured insurance programs already is challenging, negotiating terms for nonstandard risk-transfer models such as captives can be exponentially more difficult.

Shari Natovitz, vp of risk management at New York-based Silverstein Properties Inc., said that while the company has generally been successful in its negotiations over insurance requirements for its properties—including several towers at the World Trade Center site in Lower Manhattan—it still frequently encounters issues regarding its Terrorism Risk Insurance Act-backed terrorism insurance policies, which it funds through captive programs.

“The captive allows us to provide significant limits that we would not be able to get through a purchase in the open market,” Ms. Natovitz said. “In that way, we're actually able to exceed the requirements of our lenders.”

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However, lenders are becoming increasingly insistent on ratings thresholds for a borrower's insurers.

Unlike in years past, the tighter requirements on ratings now typically apply to all insurers and reinsurers on a program. And in most cases, simply having rated underwriters on a policy might not satisfy requirements, as lenders are better positioned to insist on minimum ratings thresholds.

But many captive programs might not be rated at all, as is the case with Silverstein Properties' TRIA captives—though they are backed by rated reinsurers. In those instances, risk managers must carefully explain their program's mechanics and ensure that any reinsurers to the program are sufficiently rated in order to satisfy their lender's rating requirements, Ms. Natovitz said.

“It takes some time and a good deal of documentation for the lender to understand how that works,” she said. “That has been and continues to be our biggest challenge.”

Aside from stricter documentation requirements that began after the Great Recession, many property underwriters have changed their standard terms and conditions—from large-scale shifts for catastrophe-exposed property to lesser changes such as rolling back eliminating insurers' notice-of-cancellation clauses.

“In a lot of cases, we've asked lenders to put the onus on us,” said Chris Nassa, global risk management director at Los Angeles-based commercial realtor CBRE Inc. “Where the insurers have said, "We're not going to give notice of cancellation anymore,' we've said to the lenders that, as the property owner, we'll take on that responsibility.”

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And while potential owners may be lured back to the property market by low real estate prices and low interest rates, the net benefit of doing so can erode quickly if a risk manager must purchase additional, possibly unnecessary property coverage to avoid jeopardizing the loan.

“We've certainly seen that happen,” Mr. Madden said. “The problem is, those additional insurance policies are usually acquired in the 11th hour of the lending process. It's very difficult to get a good price on insurance in those circumstances.”

Under pressure to expedite negotiations over a lender's proposed insurance covenants, risk managers also must take care not to betray their firm's duty of confidentiality to its tenants or insurers, experts said.

For example, risk managers may forward on to the lender the summaries of insurance distributed to its subsidiaries or tenants to satisfy the lender's request for detailed information on a blanket insurance program.

“Insurers likely wouldn't be too happy with those companies broadcasting to the world that they receive these additional coverages or additional leeway in their program that others might not be offered,” Mr. Nassa said.

Similarly, lenders may ask to see a schedule of valuation for an entire portfolio of assets, not just those involved in the loan, experts said. That, too, could amount to a breach of confidentiality, as those valuations can be viewed as proprietary information belonging to subsidiaries and tenants, he said.

One way some risk managers have satisfied many lenders' requests for information and reduce the need—real or perceived—of additional insurance is through the use of benchmarking studies.

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“Benchmarking has become a big part of this process,” said Jeffrey Alpaugh, the Boston-based global real estate practice leader at Marsh Inc. “We'll take similarly sized portfolios and benchmark them across certain metrics like limits, deductibles and policy language. That way, you can see what the appropriate levels of insurance are for comparable assets and comparable portfolios, based on recent renewals. We've found that to be a big help.”

Absent access to formal benchmarking studies, experts said risk managers can reduce the likelihood of encountering problematic insurance requirements in lending agreements by involving themselves earlier in the negotiating process, or even before a loan application is submitted.

“If the risk manager is involved with the financial managers or other executives in setting the loan criteria for the company as a whole, or gets involved early enough in a loan relationship, they can identify ahead of time where things might become difficult,” Ms. Ochenkowski said. “They can provide the commercial viewpoint of a particular concession, and what the practical cost of that concession is going to be.”