Effective with Selling Guide Announcement SEL-2013-08, and Servicing Guide Announcement SVC-2013-22, Fannie Mae discontinued the permissibility of insurance policies that cover multiple unaffiliated projects. The complexity of these policies can make it difficult to understand the terms of coverage and create operational risk for homeowners’ associations (HOAs) and/or sellers and servicers. Except as described in the following paragraph, unaffiliated projects may not share a single master property insurance policy, but each must maintain its own policy that meets Fannie Mae requirements, as detailed in Selling Guide section B7-3-04, Property Insurance Coverage for Units in Project Developments and underscored in Servicing Guide Announcement SVC-2016-11.
Some project insurance programs that cover multiple unaffiliated projects now provide a dedicated policy limit for each individual covered project. Such a policy structure could provide equivalent coverage to our Selling Guide requirements for the policy limit. The policy limit dedicated to the subject project needs to be sufficient to cover the full insurable replacement cost of the project improvements including the units. When reviewing the insurance programs that cover multiple unaffiliated projects, the servicer must obtain the insurance policy as well as all of the necessary schedules, endorsements, statement of values, or other associated documents to adequately evaluate the insurance coverage. The HOA must be protected in the same manner as if it maintained its own individual policy and the coverage of the individual insured project cannot be affected by any actions or omissions of unaffiliated projects covered by the same policy. Additionally, all other Selling Guide requirements for project insurance would need to be met for such a policy to be permissible; including, but not limited to:
- insurance companies underwriting the master or blanket insurance coverage must meet Fannie Mae’s insurance ratings requirements,
- the policy clearly states that each condominium, residential, or substantially residential project is a named insured, or is evidenced to be covered as an insured,
- at a minimum must protect against perils that are normally covered by the standard extended coverage endorsement, or customarily covered for similar types of projects,
- if co-insurance is included, it must be waived as stated in Selling Guide section B7-3-04,
- maximum deductible requirements must be met,
- building ordinance or law, steam boiler and machinery/equipment breakdown coverage is included, if applicable,
- the right of subrogation against unit owners must be waived, the insurance cannot be prejudiced by any acts or omissions of unit owners not under the control of the HOA, and the insurance must be primary,
- special other insurances must be included if required (i.e. earthquake insurance for Puerto Rico and some Guam buildings), and
- the policy must require the insurer to notify in writing the HOA (or insurance trustee) at least 10 days before it cancels or substantially changes a condo project’s coverage.
The servicer must document their conclusions on Form 1071 to communicate that equivalent coverage to our Selling Guide requirements has been accepted, and maintain a copy in the loan file. As a reminder, proper insurance is a continuing obligation and is a life of loan representation and warranty by lenders, subject to the flexibilities noted in Servicing Guide Announcement SVC-11-2016 which offers servicer-level insurance alternatives to positively tracking project insurance.