B-2-03: Property Insurance Requirements for Mortgage Loans Secured by a Unit in a PUD, Condo, or Co-op (12/14/2016)

© Fannie Mae Single Family Servicing Guide

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.

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.

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.