Servicing Guide

Published June 13, 2018

Determining Minimum Coverage Amounts

The following requirements apply to PUDs, condos, and co-ops.

Insurance must cover 100% of the insurable replacement cost of project improvements, including the individual units for condo and co-op projects. Extended Replacement Cost coverage, under which the insurer agrees to pay more than the property’s insurable replacement cost, is acceptable. An insurance policy that includes either of the following endorsements will ensure full insurable value replacement cost coverage:

  • a Guaranteed Replacement Cost Endorsement and, if the policy includes a coinsurance clause, an Agreed Value Option or Agreed Amount Endorsement; or

  • a Replacement Cost Endorsement and, if the policy includes a coinsurance clause, an Agreed Value Option or Agreed Amount Endorsement.

If a policy includes a coinsurance clause, and includes an Agreed Amount Endorsement or selection of the Agreed Value Option that waives the requirement for coinsurance, the policy coverage will be considered acceptable evidence the 100% insurable replacement cost of the project improvements requirement has been met. In addition, when a policy includes a coinsurance clause, but the coinsurance provision is not waived, the policy is still eligible if evidence acceptable to the servicer confirms the amount of coverage is at least equal to 100% of the insurable replacement cost of the project improvements.

The policy must protect against the perils customarily covered for similar projects, including those covered by the standard ”all risk” or ”special form coverage” endorsement or the ”broad form” covered causes of loss.

Fannie Mae prohibits project insurance policies that provide coverage for general and limited common elements of unaffiliated projects.

The HOA or the co-op corporation must maintain a policy of property insurance with premiums being paid as a common expense. The following table provides additional requirements depending on the project type.

Project Type Requirements

PUD

Fannie Mae requires individual insurance policies for each mortgage loan it purchases or securitizes in a PUD project. See B-2-02, Property Insurance Requirements for Mortgage Loans Secured by a One- to Four-Unit Property for the required amount of coverage. The servicer must also have in its possession a copy of any insurance policy covering the common areas of the PUD project.

Fannie Mae will accept a master insurance policy in satisfaction of its insurance requirements for the units if the project’s legal documents allow for master insurance policies to cover both the individual units and the common elements.

The policy must cover all of the common elements belonging to the HOA, including fixtures, building service equipment, and common personal property and supplies.

Condo

The servicer must verify property insurance, including wind and flood insurance if applicable, coverage at the project level as part of its review of a project and ensure each condo association is covered by an individual policy.

If the master insurance policy maintained by an HOA for a condo project does not cover either the interior of the condo unit or the improvements made by the borrower to the interior of the condo unit, the servicer must ensure the condo unit has an HO-6 policy.

If an HO-6 policy is required, the insurance policy must provide coverage, as determined by the insurer, sufficient to repair the condo unit to at least its condition prior to a loss claim event.

Acceptable types of HOA master insurance policies include:

  • ”Single Entity,”

  • ”All-in,” and

  • ”Bare walls.”

The policy must cover all of the general and limited common elements that are normally included in coverage, including fixtures, building service equipment, and common personal property and supplies belonging to the HOA.

Additionally, the policy must provide that

  • any Insurance Trust Agreement is recognized;

  • the right of subrogation against unit owners is waived;

  • the insurance is not prejudiced by any acts or omissions of individual unit owners not under the control of the HOA; and

  • the policy is primary, even if a unit owner has other insurance covering the same loss.

Co-op

The policy must cover the entire project, including the units.

Maximum Allowable Deductible Requirements

The maximum allowable deductible is as follows:

  • For policies covering the common elements in a PUD project, a PUD unit mortgage loan, condo projects, or co-op projects, 5% of the face amount of the policy.

  • For master insurance policies covering the individual units and the common elements, 5% of the replacement cost of the unit.

Endorsement Requirements

The required special endorsements for PUD, condo, and co-op projects are as follows:

  • An Inflation Guard Endorsement, when it can be obtained.

  • A Building Ordinance or Law Endorsement if the enforcement of any building, zoning, or land-use law will result in loss or damage, increased cost of repairs or reconstruction, or additional demolition and removal costs. The endorsement must provide for contingent liability from the operation of building laws, demolition costs, and increased costs of reconstruction.

    Note: Fannie Mae will not require a Building Ordinance or Law Endorsement if it is not obtainable in the insurance market available to the association.

  • A Steam Boiler and Machinery/Equipment Breakdown Coverage Endorsement if the project has central heating or cooling. An endorsement or separate stand-alone boiler and machinery policy must provide for the insurer’s minimum liability per accident to at least equal the lesser of $2 million or the insurable value of the building(s) housing the boiler or machinery.

Named Insured and Mortgagee Clause Requirements

In the event an HO-6 policy is required, the insurance policy must include the standard mortgagee clause. When the servicer is named as the mortgagee, its name must be followed by the phrase ”its successors and assigns.”

The following table provides the requirements regarding the name of the insured entity.

Coverage Type Requirements for Named Insured

Condo Projects

The policy must either show the HOA or, if the condo’s legal documents permit it, an authorized representative of the HOA, including its insurance trustee, as the named insured.

The ”loss payable” clause must show the HOA or the insurance trustee as a trustee for each unit owner and the holder of each unit’s mortgage loan.

PUD Common Areas

The policy must show the HOA as the named insured.

Co-op Project Common Areas

The policy must show the co-op corporation as the named insured.

Acceptable Evidence of Master Insurance Policies

Acceptable evidence of master insurance coverage for a unit in a PUD, condo, or co-op project includes either:

  • a copy of the current master policy and any endorsements, and a certificate of insurance showing the individual unit securing the mortgage loan is covered under the policy;

  • a blanket insurance policy which covers every project in which the servicer services Fannie Mae mortgage loans, with premiums borne by the servicer as a corporate expense; or

  • an insurance policy maintained by the servicer which provides ”walls-in” as well as loss assessment coverage as needed in the event of an uninsured loss for all Fannie Mae PUD, condo, or co-op mortgage loans serviced by the servicer.

The servicer must ensure on an annual basis that the master insurance coverage or any property insurance policies it maintains for a unit in a PUD, condo, or co-op project meets the requirements outlined in this Servicing Guide.

Notification Requirements for Policy Changes or Cancellation for Condo or Co-op Projects

The following table provides the requirements for notification of policy changes or cancellations.

Project Type Requirements

Condo

The policy must require the insurer to notify in writing the HOA (or insurance trustee) and each first lien mortgage loan holder named in the mortgagee clause at least 10 days before it cancels or substantially changes a condo project’s coverage.

Co-op

The policy must require the insurer to notify in writing the co-op corporation (or insurance trustee) and each first lien mortgage loan holder named in the mortgagee clause at least 30 days before it cancels or substantially changes coverage.

Related Announcements

The following table provides references to Announcements that are related to this topic.

Announcements Issue Date
Announcement SVC-2016–11 December 14, 2016