When General Liability Insurance Is Required
If you're buying a condo or co-op unit, the project's homeowners association or co-op corporation must carry general liability insurance. This requirement applies to virtually all condo and co-op developments that Fannie Mae finances.
There are only two exceptions. Projects that qualify for a waiver of project review under [[B4-2.1-02]] don't need this coverage. These are typically smaller projects with strong financial profiles. Condo projects reviewed under the limited review process per [[B4-2.2-01]] also get an exemption.
Your lender will verify this insurance exists during the loan approval process. If the project lacks proper coverage, your loan won't meet Fannie Mae guidelines.
What the Insurance Must Cover
The liability policy must protect against bodily injury and property damage claims arising from the project's common areas. This includes lobbies, hallways, elevators, pools, fitness centers, and parking areas.
Say someone slips and falls in the lobby of your condo building. The general liability policy would cover the association's legal defense costs and any damages awarded to the injured person.
The coverage extends to commercial spaces owned by the HOA or co-op corporation, even when leased to outside businesses. If your building's ground floor houses a coffee shop owned by the association, that space falls under the liability policy.
Coverage Amount Requirements
The minimum coverage is $1 million per occurrence for both bodily injury and property damage. This means each separate incident can trigger up to $1 million in coverage.
Most associations carry higher limits, often $2 million or more. Larger projects with extensive amenities typically need more coverage due to increased exposure to claims.
The $1 million minimum applies regardless of the project's size. A 20-unit building needs the same minimum coverage as a 200-unit high-rise.
Separation of Insureds Protection
The policy must include a separation of insureds or severability of interests provision. This protects individual unit owners from having their claims denied because of the association's negligent acts or the actions of other unit owners.
Without this provision, the insurance company could deny your claim if the HOA was also at fault for the same incident. The separation clause treats each insured party as if they have their own separate policy.
If the policy doesn't include this language in its standard terms, Fannie Mae requires a specific endorsement to provide the same protection. Your lender will review the policy documents to confirm this coverage exists.
Named Insured and Premium Payment
The HOA or co-op corporation must be the named insured on the policy. Individual unit owners are typically covered as additional insureds, but the association holds the primary relationship with the insurance company.
The association pays the premiums as a common expense. This cost gets built into your monthly HOA or maintenance fees along with other shared expenses like landscaping and utilities.
You can't substitute your own liability coverage for the association's policy. Even if you carry substantial personal liability insurance, the project still needs its own master policy to meet Fannie Mae requirements.
Documentation Your Lender Needs
Your lender will request a certificate of insurance from the HOA or management company. This document confirms the policy is active and meets Fannie Mae's requirements.
The certificate must show the coverage amounts, policy period, and named insured. It should also confirm that separation of insureds coverage is included or attached as an endorsement.
Some lenders also request a copy of the full policy or at least the declarations page. This provides more detail about coverage terms and exclusions.
Why These Requirements Exist
Fannie Mae requires general liability insurance because condo and co-op projects create shared liability exposure. When multiple families live in close proximity with common areas, the risk of accidents and injuries increases.
Without proper insurance, the association could face financial ruin from a single lawsuit. This would threaten the project's stability and potentially impact property values and the association's ability to maintain the building.
The separation of insureds requirement protects individual unit owners from being penalized for the association's mistakes. This ensures that innocent unit owners can still access coverage even when the HOA acts negligently.
Common Issues That Can Complicate Approval
Some associations try to save money by carrying lower coverage limits or excluding certain areas from the policy. These shortcuts can make your unit ineligible for Fannie Mae financing.
Policies with high deductibles can also create problems. While not prohibited, deductibles above $10,000 may require additional review and documentation.
Self-insured associations or those using captive insurance companies face extra scrutiny. The lender must verify that these alternative arrangements provide equivalent protection to traditional commercial policies.
Associations that have filed recent claims or have coverage gaps in their history may need to provide additional documentation about their insurance stability.
References
For the official guidelines, see B7-4-01: General Liability Insurance Requirements for Project Developments in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B7-4-01, General Liability Insurance Requirements for Project Developments (12/14/2022)
Determining if General Liability Insurance is Required
Coverage Requirements
Determining the Required Coverage Amount
Named Insured
Determining if General Liability Insurance is Required
General liability insurance is required for all condo and co-op projects, with the following exceptions:
projects that qualify for a waiver of project review as described in B4-2.1-02, Waiver of Project Review, or
condo projects reviewed under the Limited Review method as described in B4-2.2-01, Limited Review Process.
Coverage Requirements
When required, the HOA or co-op corporation must maintain a general liability insurance policy for the entire project. The general liability insurance policy must include coverage for:
commercial spaces that are owned by the HOA or co-op corporation, even if they are leased to others, and
bodily injury and property damage that results from the operation, maintenance, or the use of the project's common elements, and any other areas that are under its supervision.
The general liability insurance policy must include a separation of insureds or severability of interests provision in its terms. If the policy does not include separation of insureds or severability of interests in its terms, Fannie Mae requires a specific endorsement to preclude the insurer's denial of a unit owner's claim because of negligent acts of the HOA or co-op corporation or of other unit owners.
Determining the Required Coverage Amount
The amount of coverage must be at least $1 million for bodily injury and property damage for any single occurrence.
Named Insured
The general liability insurance policy must designate the HOA or co-op corporation as the named insured with the premiums paid as a common expense by the HOA or co-op corporation.
