Introduction
This topic contains information on master property insurance requirements for project developments, including:
- Overview
- Determining if a Master Property Insurance Policy is Required
- Coverage Requirements
- Determining the Required Coverage Amount
- Deductible Requirements
- Special Coverage Requirements for Project Developments
- Special Coverage Requirements for Condo Projects
- Builder/Developer Property Insurance Policies
- Policies Covering Multiple Projects
Overview
This topic covers requirements for master property insurance policies covering the common elements and residential structures of project developments.
The requirements applicable to condo projects in this topic also apply to two- to four-unit condos and detached condos, unless stated otherwise.
For the purposes of this topic and B7-3-04, Individual Property Insurance Requirements for a Unit in a Project Development, the following definitions apply:
- Common elements refers to insurable, non-residential elements of a project development. Examples include, but are not limited to, clubhouses, parking areas or structures, and recreational facilities.
- Residential structures refers to the insurable elements of a building that contains one or more residences.
Determining if a Master Property Insurance Policy is Required
The requirements for individual property insurance policies will vary based on the homeowners' association (HOA) or co-op corporation's legal documents and the master property insurance policy. The following table provides the requirements based on the project type.
| Project Type | Requirement |
|---|---|
| PUD |
Individual property insurance policies as described in B7-3-02, Property Insurance Requirements for One-to Four-Unit Properties are required for each property securing a loan that Fannie Mae purchases in a PUD project unless the project's legal documents provide for a master property insurance policy that covers both the common elements and residential structures. In that case, Fannie Mae will accept the master property insurance policy in satisfaction of its insurance requirements for the subject property. The borrower may still have to maintain an individual unit owner policy as described in Coverage Requirements in this topic. When units located within a PUD are covered by a master property insurance policy maintained by the HOA, the lender or servicer must verify that the insurance provides coverage for both the common elements and residential structures. When units located within a PUD are covered by individual property insurance policies maintained by their respective owner(s), the lender or servicer is not required to verify master property insurance coverage on PUD common elements. |
| Condo |
Master property insurance policies are required for the common elements and residential structures for each loan that Fannie Mae purchases in a condo project unless the condo project's legal documents require individual property insurance policies for each unit. In that case, the individual property insurance policy must meet the requirements in B7-3-02, Property Insurance Requirements for One-to Four-Unit Properties. When a master property insurance policy is required, the lender or servicer must verify that the master property insurance provides coverage for both the common elements and residential structures. The borrower may still have to maintain an individual unit owner policy as described in Coverage Requirements in this topic. |
| Co-op |
Master property insurance policies are required for the common elements and residential structures for each loan that Fannie Mae purchases in a co-op project unless the co-op project's legal documents require individual property insurance policies for each unit. In that case, the individual property insurance policy must meet the requirements in B7-3-02, Property Insurance Requirements for One-to Four-Unit Properties. When a master property insurance policy is required, the lender or servicer must verify that the master property insurance provides coverage for both the common elements and residential structures. The borrower may still have to maintain an individual unit owner policy as described in Coverage Requirements in this topic. |
To the extent the master property insurance policy does not cover the interior of the unit or improvements to the unit, the borrower must maintain an individual unit owner property insurance policy (see B7-3-04, Individual Property Insurance Requirements for a Unit in a Project Development for additional requirements).
Coverage Requirements
When required, a master property insurance policy must be maintained with premiums paid as a common expense by the HOA or co-op corporation, as applicable. The policy must cover all insurable property elements. Common personal property and supplies should be covered, if applicable.
Master property insurance coverage policies covering project developments should be written on a "Special" coverage form or equivalent. At a minimum, the coverage must include the perils listed in the following table.
| ✓ | Required Perils |
|---|---|
| Fire | |
| Lightning | |
| Explosion | |
| Windstorm (including named storms designated by the U.S. National Weather Service or the National Oceanic and Atmospheric Administration by a name or number) | |
| Hail | |
| Smoke | |
| Aircraft | |
| Vehicles | |
| Riot or civil commotion | |
| Vandalism | |
| Sprinkler leakage | |
| Sinkhole collapse | |
| Volcanic eruption | |
| Falling objects | |
| Weight of snow, ice or sleet | |
| Water damage |
If a master property insurance policy excludes or limits coverage of any of the required perils, the HOA or co-op corporation must obtain an acceptable stand-alone property insurance policy which provides adequate coverage for the limited or excluded peril (see B7-3-05, Additional Insurance Requirements for additional information).
The policy must provide for claims to be settled on a replacement cost basis. Policies written on an actual cash value basis are not acceptable.
See Named Insured for Property and Flood Insurance in B7-3-08, Mortgagee Clause, Named Insured, and Notice of Cancellation Requirements for the named insured requirements.
Determining the Required Coverage Amount
Property insurance must be in an amount at least equal to 100% of the replacement cost value of the project improvements, including common elements and residential structures.
An insurance policy that includes any of the following coverage, either in the policy language or in a specific endorsement to the policy, is acceptable:
- Guaranteed Replacement Cost,
- Extended Replacement Cost, or
- Replacement Cost.
When the lender or servicer must verify the coverage amount is not less than the minimum required as described above, the verification source may be the property insurer, an independent insurance risk specialist, or other professional with appropriate resources to make such a determination.
Master Property Insurance Policies with Coinsurance
Policies with coinsurance provisions can create additional risk for an HOA in the event of a loss if the amount of insurance coverage is less than 100% of the replacement cost value. Master property policies that provide coverage at 100% of the replacement cost value of the project improvements, including the individual units, alleviate the risk of a coinsurance penalty being applied in the event of a loss.
If the policy has a coinsurance clause, inclusion of an Agreed Amount Endorsement or selection of the Agreed Value Option (which waives the requirement for coinsurance) is considered acceptable evidence that the 100% replacement cost requirement has been met. If an Agreed Amount / Agreed Value provision is used, the Agreed Amount must be no less than the estimated replacement cost value.
If the policy includes a coinsurance clause, but the coinsurance provision is not waived, the policy is still eligible if evidence acceptable to the lender or servicer confirms that the amount of coverage is at least equal to 100% of the replacement cost value of the project improvements. This evidence (documentation) must be maintained by the lender or servicer.
Deductible Requirements
The following table describes the maximum allowable deductible for master property insurance policies covering project developments.
| Deductible Type | Maximum Deductible |
|---|---|
| Per occurrence | The maximum allowable deductible for all required property insurance perils is 5% of the master property insurance coverage amount. |
| Per occurrence, multiple deductibles | When a master property insurance policy includes multiple deductibles, such as a separate deductible that applies to windstorms, or a separate deductible that applies to a specific property element such as the roof, the total amount for such deductibles applicable to a single occurrence must be no greater than 5% of the insurance coverage amount. |
| Per occurrence, per unit |
Fannie Mae will allow a per unit master property insurance policy deductible when the sum of the applicable per unit deductibles is greater than 5% of the coverage amount and all of the following requirements are met. 1. The master property insurance policy has a per unit deductible for named perils specific to a geographic area where such coverage is common and customary; and 2. The borrower's individual property insurance policy includes a. coverage for the applicable peril(s); b. coverage for master property insurance policy deductible assessments levied on the unit owner by the HOA or co-op corporation for the applicable peril(s); and c. loss assessment coverage in an amount sufficient to cover assessments in excess of 5% of the master property insurance policy coverage amount, divided by the number of units. |
Special Coverage Requirements for Project Developments
The following special coverage requirements apply to condo, co-op, and PUD master property insurance policies:
- Inflation Guard Coverage - The coverage is not required if it is not obtainable in the insurance market available to the association;
- Building Ordinance or Law Coverage - The coverage must include:
- Coverage A: loss to the undamaged portion of a building,
- Coverage B: demolition costs, and
- Coverage C: increased costs of construction.
Building Ordinance or Law Coverage may be included in the property coverage form or obtained as an endorsement to the property insurance policy. The coverage is not required if it is not obtainable in the insurance market available to the association; and
- Boiler and Machinery/Equipment Breakdown Coverage - This coverage is required if the project development has central heating or cooling. The coverage amount must equal the lesser of $2 million or the replacement cost value of the building(s) housing the boiler or machinery. This coverage may be included in the property coverage form, obtained as an endorsement to the master property insurance policy, or the HOA or co-op corporation may purchase a stand-alone boiler and machinery policy.
Special Coverage Requirements for Condo Projects
Master property insurance policies for condo projects must be endorsed with a Condominium Association Coverage Form or its equivalent. The endorsement must include the following provisions or comparable language:
- Recognition of an Insurance Trustee: If you name an insurance trustee, we will adjust losses with you, but we will pay the insurance trustee. If we pay the trustee, the payments will satisfy your claims against us.
- Waiver of Rights Recovery: We waive our rights to recover payment from any unit-owner of the condominium that is shown in the declarations.
- Unit-owner's Insurance: A unit-owner may have other insurance covering the same property as this insurance. This insurance is intended to be primary, and not to contribute with such other insurance.
Builder/Developer Property Insurance Policies
When a project is under development, it may be covered by the builder/developer's property insurance policy if the policy provides equivalent coverage to the requirements for project developments in this topic. When property coverage ceases per the terms of the builder/developer's policy, the HOA or co-op corporation must obtain a master property insurance policy in accordance with Fannie Mae's requirements.
Separate projects under development by the same developer will be considered affiliated during the period when control of the project has not yet transferred from the builder/developer to the individual owners or related HOA or co-op corporation. The affiliated status of the subject project ends when the property coverage ceases per the terms of the builder/developer's policy.
Policies Covering Multiple Projects
Except as described below, unaffiliated projects may not share a master property insurance policy. Each project must maintain its own policy that meets Fannie Mae requirements, as detailed throughout this topic.
If a property insurance policy that covers multiple unaffiliated projects provides a dedicated coverage amount for each individual covered project, the policy structure may provide equivalent coverage to Fannie Mae's coverage amount requirements. The coverage amount dedicated to the subject project must be sufficient to cover the full replacement cost value of the project improvements including the common elements and residential structures.
The lender or servicer must review the insurance policy and any other associated documents needed to adequately evaluate the insurance coverage. The HOA or co-op corporation must be protected in the same manner as if it maintained a master property insurance policy. The coverage of each insured project cannot be affected by any actions or omissions of unaffiliated projects covered by the same policy. Additionally, all other master property insurance requirements for project developments must be met.
The lender or servicer must document how they determined the applicable policy provides acceptable coverage as detailed above. A copy of the policy, along with the lender's or servicer's documentation must be maintained in the loan file.
Recent Related Announcements
The table below provides references to recently issued Announcements that are related to this topic.
| Announcements | Issue Date |
|---|---|
| Announcement SEL-2022-10 | December 14, 2022 |