8202.2: Minimum property insurance types and amounts (08/29/18)

(a) 1- to 4-unit properties

At a minimum, the insurable improvements on the Mortgaged Premises must be insured for loss or damage from fire, lightning and other perils (windstorm, hail, explosion, riot, civil commotion, damage by aircraft, damage by vehicles and damage by smoke) covered within the scope of standard extended coverage. If any of the preceding perils (e.g., windstorm) is excluded from the primary insurance policy, coverage of the excluded peril must be picked up through a secondary insurance policy such as may be written by a state insurance pool under Section 8202.1(c)(number 3). The insurance limits must at least equal the higher of:

• The UPB of the Mortgage
• 80% of the full replacement cost of the insurable improvements

The coverage required in accordance with the above formula must not exceed the replacement cost of the insurable improvements, even when the UPB of the Mortgage exceeds such replacement cost.

The Seller/Servicer must ensure that adequate insurance coverage is in force even when the improvements are vacant or unoccupied and must notify all insurers of any such change in occupancy in order to preserve its rights as mortgagee under the applicable insurance policy.

The deductible for fire, water (not caused by flooding) or wind damage to the insured improvements (generally designated as "dwelling" in the insurance policy) may not exceed 5 percent of the limit maintained for dwelling coverage.

(b) Planned Unit Developments (PUDs); ground lease communities

Unit owners within a Planned Unit Development (PUD) and leasehold lessees within a ground lease community with residential properties similar to 1- to 4- unit properties can insure their units individually, provided that the requirements in Section 8202.2(a) are met.If the individual units are covered by insurance purchased by their respective owners or leasehold lessees, the PUD homeowners association or the fee simple landowner/lessor of the ground lease community must also insure Common Elements for 100% of their replacement cost under a commercial package policy which covers, at a minimum, loss from causes identified in the Insurance Services Office's (ISO's) Commercial Property Causes of Loss — Special Form endorsement. The policy must provide for loss or damage settlement at replacement cost.If the insurable value of the Common Elements is minimal or does not exist, the homeowners association or the fee simple landowner/lessor is not required to insure the Common Elements. Examples of Common Elements with minimal insurable value may include items such as entrance signage and lamp posts. Common Elements with an insurable value that is not de minimis are required to be insured (e.g., a PUD's clubhouse or pool house).A policy with a coinsurance clause, and 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. If a coinsurance clause is included in the PUD homeowners association's policy or the fee simple landowner/lessor's policy, the policy is still eligible if the amount of coverage is at least equal to 100% replacement cost.A policy with one of the following is also acceptable to reach full replacement cost:

• Extended replacement cost – provides an extension to the insurable replacement cost
• Guaranteed replacement cost – provides replacement for the property regardless of cost

Freddie Mac will also accept a master or blanket insurance covering all units in the PUD or ground lease community as well as insurable Common Elements, if called for in the PUD's governing documents or in the lease. Such coverage must meet the requirements applicable to each PUD or ground lease community unit and those applicable to insurable Common Elements. However, Mortgages secured by units in a PUD with a master or blanket insurance policy that combines insurance coverage for multiple unaffiliated PUDs are not eligible for sale to Freddie Mac. Projects that are under the same master association and/or share the use of common facilities, whether those facilities are individually owned or owned as part of a master association or development, are considered to be affiliated projects. Multiple PUD projects that do not meet one of these criteria, even if they are under the management of the same management company, are not considered to be affiliated projects. Deductibles are allowed under this blanket coverage under the terms and conditions stipulated below.

The homeowners association or fee simple landowner/lessor must also obtain any additional coverage commonly required by private mortgage investors for developments similar in construction, location and use, including the following:

• Inflation guard endorsement – this endorsement is required when it is applicable to the coverage and available in the insurance market
• Building ordinance or law endorsement – this endorsement is not required if the building is legally conforming under current building, zoning or land use laws, or is not available; however, it is required if the enforcement of any law or ordinance results in increased costs such as demolition or loss to the undamaged portions of the building and the coverage is available in the insurance market
• Steam boiler and machinery or equipment breakdown endorsement – this endorsement is required if a building in the project has a central heating ventilation and cooling (HVAC) system and the coverage is available in the insurance market

The insurance limit per covered mechanical breakdown or equipment failure must equal the lesser of:

• 100% of the replacement cost of the building housing the equipment, or
• $2 million

If a higher limit is required by private mortgage investors for PUDs similar in construction, location and use, the PUD homeowners association must maintain the higher insurance limit.

The deductible for fire, water (not caused by flooding) or wind damage to the insured improvements (generally designated as "building" in the insurance policy) may not exceed five percent of the limit maintained for building coverage.

The insurance policy of the PUD homeowners association or fee simple landowner/lessor of the ground lease community must name the insured in substantially the same language indicated below:

• For PUDs: Association of Owners of the [Name of PUD] Planned Unit Development for the use and benefit of the individual owners (designated by name, if required by law or the governing documents).
• For ground lease communities: [Name of the lessor] of the [Name of the ground lease community] for the use and benefit of the individual lessees (designated by name, if required by law or by the lease).

(c) Condominiums

The condominium governing documents will define the insurance requirements for the association and the individual unit owner in a Condominium Project, including a Detached Project and a 2- to 4-unit Condominium Project. The insurance requirements will define the extent to which the association will insure the individual units and the unit owner responsibility for individual insurance.The unit owner has two options for unit coverage, depending on what the governing documents require:

• If required by the governing documents, the condominium homeowners association must insure the building and structures in the project as well as fixtures, machinery, equipment and supplies maintained for the service of the project. To the extent required the association must also insure fixtures, improvements, alterations and equipment within the individual Condominium Units, regardless of ownership. To the extent the condominium homeowners association's policy does not cover the interior of the unit or the improvements to the unit, the Borrower must maintain an HO-6 unit owner policy. Coverage for the HO-6 unit owner policy must be sufficient to repair the Condominium Unit to at least its condition prior to the claim.
• If required by the governing documents that the unit owners insure their units individually, in lieu of a master policy, the Mortgages secured by the Condominium Units are eligible for sale to Freddie Mac provided the requirements in Sections 8202.2 through 8202.9 applicable to 1- to 4-unit properties are met. Common elements must be covered through the condominium homeowners association policy and the homeowners association must maintain all other applicable insurance coverages required in Sections 8202.2 through 8202.9.

The condominium homeowners association must insure common elements and property for 100% of their replacement cost under a Condominium Association Coverage Form of the ISO or equivalent commercial package policy which covers, at a minimum, loss from causes identified in the ISO's Commercial Property Causes of Loss — Special Form endorsement. The insurance coverage must provide for loss or damage settlement at replacement cost.

A policy with a coinsurance clause, and 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. Also, if a coinsurance clause is included in the Condominium Project's policy, the policy is still eligible if the amount of coverage is at least equal to 100% replacement cost.

A policy with one of the following is also acceptable to reach full replacement cost:

• Extended replacement cost – provides an extension to the insurable replacement cost
• Guaranteed replacement cost – provides replacement for the property regardless of cost

The condominium homeowners association must also obtain any additional coverage commonly required by private mortgage investors for developments similar in construction, location and use, including the following:

• Inflation guard endorsement – this endorsement is required when it is applicable to the coverage and available in the insurance market
• Building ordinance or law endorsement – this endorsement is not required if the building is legally conforming under current building, zoning or land use laws, or is not available; however, it is required if the enforcement of any law or ordinance results in increased costs such as demolition or loss to the undamaged portions of the building and the coverage is available in the insurance market
• Steam boiler and machinery or equipment breakdown endorsement – this endorsement is required if a building in the project has an HVAC system and the coverage is available in the insurance marketThe insurance limit per covered mechanical breakdown or equipment failure must equal the lesser of:
• 100% of the replacement cost of the building housing the equipment, or
• $2 million

If a higher limit is required by private mortgage investors for Condominium Projects similar in construction, location and use, the condominium homeowners association must maintain the higher insurance limits.

The condominium homeowners association's policy deductible for fire, water (not caused by flooding) or wind damage to the insured improvements (generally designated as "building" in the insurance policy) may not exceed 5% of the limit maintained for building coverage.

If the deductible exceeds the 5% maximum due to a per unit deductible for named perils specific to a geographic area, the Mortgage is eligible for sale to Freddie Mac if the individual is covered by the unit owner HO-6 policy. The unit owner policy must include the same perils as the condominium associations homeowner's policy, cover master policy assessments levied on the unit owner and carry a sufficient coverage amount to cover the per unit amount over the permissible 5% limit.

For example:

• Condominium association policy limit: $6,000,000
• Number of units: 20
• Condominium association policy deductible: $80,000
• Condominium association separate per unit deductible for ice dam coverage: $40,000

The master deductible of $80,000 is 1.33% of the building coverage ($80,000/$6,000,000) and does not exceed the 5% deductible requirement. However, the per unit deductible is 13.3% (($40,000 x 20 units)/$6,000,000)) which is above the 5% maximum requirement and the policy is not acceptable.

The maximum per unit deductible needed to meet the 5% deductible requirement is $15,000 (($6,000,000/20) x .05)). To be eligible, the unit owner needs an HO-6 policy that would cover the $25,000 per unit coverage ($40,000 - $15,000 = $25,000).

Mortgages secured by a Condominium Unit in a Condominium Project with a master or blanket insurance policy that combines insurance coverage for multiple unaffiliated Condominium Projects are not eligible for sale to Freddie Mac.

Projects that are under the same master association and/or share the use of common facilities, whether those facilities are individually owned or owned as part of a master association or development, are considered to be affiliated projects. Multiple Condominium Projects that do not meet one of these criteria, even if they are under the management of the same management company, are not considered to be affiliated projects.

The insurance policy of the condominium homeowners association must name the insured in substantially the same language indicated below:

• Association of Owners of the [Name of Condominium Project] Condominium for the use and benefit of the individual owners (designated by name, if required by law or the governing documents).

In the event the HO-6 unit owner policy is required, the policy must include the standard Mortgage clause required in Section 8202.7.