When Master Property Insurance Is Required
The type of project you're buying in determines whether you need individual property insurance or rely on a master policy maintained by the homeowners association. For condominiums and co-ops, Fannie Mae requires master property insurance covering both common areas and residential structures. This means the HOA or co-op corporation maintains one large policy that protects the entire development. You may still need your own unit owner policy to cover personal property and improvements inside your unit. PUD projects work differently. Each homeowner typically maintains their own individual property insurance policy covering their entire unit and any attached land. However, if the PUD's legal documents require master coverage for all residential structures, Fannie Mae will accept that arrangement instead. Say you're buying a townhome in a PUD where each unit has its own roof and exterior walls. You'll likely need your own homeowner's policy. But if you're buying in a PUD where multiple units share a building structure, the legal documents might require master coverage for those shared elements.
What the Master Policy Must Cover
Master property insurance policies must provide comprehensive protection using replacement cost coverage. This means if damage occurs, the insurance company pays to rebuild or repair using current construction costs, not depreciated values. The policy must cover all insurable property elements including common areas like clubhouses, parking structures, and recreational facilities. It must also protect residential structures — the actual buildings where people live. Coverage must include at least 14 specific perils: fire, lightning, explosion, windstorm, hail, smoke, aircraft or vehicles, riot, vandalism, sprinkler leakage, sinkhole collapse, volcanic action, falling objects, weight of snow or ice, and water damage. The policy should be written on a "Special" coverage form, which protects against all risks except those specifically excluded. If the master policy excludes any required peril, the HOA must purchase separate coverage for that risk. For example, if the main policy excludes earthquake damage in a high-risk area, the association needs a standalone earthquake policy.
Coverage Amount Requirements
The master policy must provide coverage equal to 100% of the replacement cost value of all project improvements. This includes both common elements and residential structures as of the current policy effective date. Your lender will verify this coverage amount through the property insurer, an independent insurance risk specialist, or another qualified professional. They might use a replacement cost estimator, insurance risk appraisal, or statement from the insurer. This requirement protects against underinsurance. If a development only carries 80% of replacement cost coverage and suffers major damage, the insurance payout won't cover full reconstruction costs. The shortfall could result in special assessments to unit owners.
Deductible Limits
Master property insurance deductibles cannot exceed 5% of the total coverage amount. This limit applies whether the policy has one deductible for all perils or multiple deductibles for different types of damage. Some policies have separate deductibles — perhaps $10,000 for fire damage but $50,000 for windstorm damage. The total of all deductibles that could apply to a single incident cannot exceed the 5% limit. There's one exception for per-unit deductibles. In areas where per-unit deductibles are common for specific perils like hurricanes, Fannie Mae allows higher amounts if your individual unit owner policy covers the excess. Your policy must include coverage for the applicable perils, deductible assessments from the HOA, and loss assessment coverage for amounts above the 5% threshold. The HOA can purchase deductible buy-back insurance to meet these requirements. This separate policy covers the association's deductible obligations when claims occur.
Special Coverage Requirements
Certain types of coverage may be required depending on the development's characteristics and location. Inflation Guard Coverage adjusts the coverage amount annually to account for rising construction costs. This prevents the policy from becoming inadequate over time due to inflation. Building Ordinance or Law Coverage protects against increased costs when rebuilding must comply with current building codes. This coverage has three parts: loss to undamaged portions that must be demolished, demolition costs, and increased construction costs due to code changes. Boiler and Machinery Coverage (also called Equipment Breakdown Coverage) is required if the development has central heating or cooling systems. The coverage amount must equal the lesser of $2 million or the replacement cost of buildings housing the equipment. These special coverages aren't required if they're not available in the local insurance market. However, most developments in standard insurance markets can obtain these protections.
Condo-Specific Requirements
Master policies for condominium projects need a Condominium Association Coverage Form endorsement with specific provisions. The endorsement must include recognition of an insurance trustee, allowing the insurer to pay a designated trustee rather than the association directly. It must waive the insurer's rights to recover payments from individual unit owners. The policy must also be primary coverage that doesn't contribute with unit owners' individual policies. These provisions prevent conflicts between the master policy and individual unit owner policies. Without proper endorsements, coverage gaps or disputes could arise when claims occur.
Documents Your Lender Will Review
Your lender must verify several aspects of the master property insurance before approving your loan. They'll review the actual insurance policy to confirm coverage types, amounts, and deductibles meet Fannie Mae requirements. They'll examine the policy declarations page showing coverage limits and effective dates. The lender will obtain verification of the coverage amount from the insurer or qualified professional. This might be a replacement cost estimate, insurance appraisal, or insurer statement confirming adequate coverage. For condos, they'll verify the policy includes the required Condominium Association Coverage Form endorsement. They'll also confirm the named insured is properly designated according to Fannie Mae requirements referenced in guideline B7-3-01: General Property Insurance Requirements for All Property Types.
Common Issues That Complicate Approval
Several situations can create problems during the loan approval process. Policies with actual cash value coverage instead of replacement cost coverage don't meet Fannie Mae requirements. Actual cash value deducts depreciation from claim payments, potentially leaving the development underinsured. Coverage gaps occur when the master policy excludes required perils without separate coverage. If the policy excludes water damage in a flood-prone area without standalone flood insurance, this creates an unacceptable gap. Excessive deductibles above the 5% limit require either policy changes or additional coverage. Some developments discover their windstorm deductible alone exceeds the allowable amount. Inadequate coverage amounts based on outdated replacement cost estimates can delay closing. If the policy covers $10 million but current replacement cost is $15 million, the association needs to increase coverage or obtain an updated appraisal justifying the lower amount. Builder-controlled policies during development phases sometimes don't transfer properly to the HOA. The transition from developer coverage to association-maintained coverage must be seamless to avoid gaps.
References
For the official guidelines, see B7-3-03: Master Property Insurance Requirements for Project Developments in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
No spam · Unsubscribe anytime
Original Fannie Mae Guideline Text
B7-3-03, Master Property Insurance Requirements for Project Developments (02/07/2024)
Overview
Determining if a Master Property Insurance Policy is Required
Coverage Requirements
Determining the Required Coverage Amount
Deductible Requirements
Special Coverage Requirements for Project Developments
Special Coverage Requirements for Condo Projects
Builder/Developer Property Insurance Policies
Overview
This topic covers requirements for master property insurance policies covering the common elements and residential structures of project developments.
The requirements applicable to condo projects in this topic also apply to two- to four-unit condos and detached condos, unless stated otherwise.
, the following definitions apply:
Common elements refers to insurable, non-residential elements of a project development. Examples include, but are not limited to, clubhouses, parking areas or structures, and recreational facilities.
Residential structures refers to the insurable elements of a building that contains one or more residences.
Determining if a Master Property Insurance Policy is Required
The requirements for individual property insurance policies will vary based on the homeowners' association (HOA) or co-op corporation's legal documents and the master property insurance policy. The following table provides the requirements based on the project type.
PUD
Individual property insurance policies as described in
are required for each property securing a loan that Fannie Mae purchases in a PUD project unless the project's legal documents provide for a master property insurance policy that covers both the common elements and residential structures. In that case, Fannie Mae will accept the master property insurance policy in satisfaction of its insurance requirements for the subject property. The borrower may still have to maintain an individual unit owner policy as described in Coverage Requirements in this topic.
When units located within a PUD are covered by a master property insurance policy maintained by the HOA, the lender or servicer must verify that the insurance provides coverage for both the common elements and residential structures.
When units located within a PUD are covered by individual property insurance policies maintained by their respective owner(s), the lender or servicer is not required to verify master property insurance coverage on PUD common elements.
Condo
Master property insurance policies are required for the common elements and residential structures for each loan that Fannie Mae purchases in a condo project unless the condo project's legal documents require individual property insurance policies for each unit. In that case, the individual property insurance policy must meet the requirements in
.
When a master property insurance policy is required, the lender or servicer must verify that the master property insurance provides coverage for both the common elements and residential structures. The borrower may still have to maintain an individual unit owner policy as described in Coverage Requirements in this topic.
Co-op
Master property insurance policies are required for the common elements and residential structures for each loan that Fannie Mae purchases in a co-op project unless the co-op project's legal documents require individual property insurance policies for each unit. In that case, the individual property insurance policy must meet the requirements in
.
When a master property insurance policy is required, the lender or servicer must verify that the master property insurance provides coverage for both the common elements and residential structures. The borrower may still have to maintain an individual unit owner policy as described in Coverage Requirements in this topic.
To the extent the master property insurance policy does not cover the interior of the unit or improvements to the unit, the borrower must maintain an individual unit owner property insurance policy (see
for additional requirements).
Coverage Requirements
When required, a master property insurance policy must be maintained with premiums paid as a common expense by the HOA or co-op corporation, as applicable. The policy must cover all insurable property elements. Common personal property and supplies should be covered, if applicable.
The master property insurance policy must provide for claims to be settled on a replacement cost basis. Property insurance policies that provide for claims to be settled on an actual cash value basis are not acceptable. Policies that limit, depreciate, reduce or otherwise settle losses at anything other than a replacement cost basis are also not acceptable.
Master property insurance coverage policies covering project developments should be written on a "Special" coverage form or equivalent. At a minimum, the coverage must include the perils covered by a commercial "Broad" coverage form, as listed in the following table.
✓
Explosion
Windstorm (including named storms designated by the U.S. National Weather Service or the National Oceanic and Atmospheric Administration by a name or number)
Water damage
If a master property insurance policy excludes or limits coverage of any of the required perils, the HOA or co-op corporation must obtain an acceptable stand-alone property insurance policy which provides adequate coverage for the limited or excluded peril (see
for additional information).
See Named Insured for Property and Flood Insurance in
for the named insured requirements.
Determining the Required Coverage Amount
The lender or servicer must verify that the property insurance coverage amount is at least equal to 100% of the replacement cost value of the project improvements, including common elements and residential structures, as of the current property insurance policy effective date.
The source that the lender or servicer uses to verify the coverage amount may be the property insurer, an independent insurance risk specialist, or other professional with appropriate resources to make such a determination. This may include, but is not limited to, a statement from the insurer or other applicable professional, a replacement cost estimator, or an insurance risk appraisal.
Deductible Requirements
The following table describes the maximum allowable deductible for master property insurance policies covering project developments.
Per occurrence
The maximum allowable deductible for all required property insurance perils is 5% of the master property insurance coverage amount.
Per occurrence, multiple deductibles
When a master property insurance policy includes multiple deductibles, such as a separate deductible that applies to windstorms, or a separate deductible that applies to a specific property element such as the roof, the total amount for such deductibles applicable to a single occurrence must be no greater than 5% of the insurance coverage amount.
Per occurrence, per unit
Fannie Mae will allow a per unit master property insurance policy deductible when the sum of the applicable per unit deductibles is greater than 5% of the coverage amount and all of the following requirements are met.
The master property insurance policy has a per unit deductible for named perils specific to a geographic area where such coverage is common and customary; and
The borrower's individual property insurance policy includes
a. coverage for the applicable peril(s);
b. coverage for master property insurance policy deductible assessments levied on the unit owner by the HOA or co-op corporation for the applicable peril(s); and
c. loss assessment coverage in an amount sufficient to cover assessments in excess of 5% of the master property insurance policy coverage amount, divided by the number of units.
Note: A deductible buy-back insurance policy purchased by the HOA or co-op corporation may be used to meet Fannie Mae's master property insurance policy deductible requirements, provided the policy meets all other property insurance requirements in Chapter B7-3, Property and Flood Insurance, including insurer rating requirements.
Special Coverage Requirements for Project Developments
The following special coverage requirements apply to condo, co-op, and PUD master property insurance policies:
Inflation Guard Coverage - The coverage is not required if it is not obtainable in the insurance market available to the association;
Building Ordinance or Law Coverage - The coverage must include:
Coverage A: loss to the undamaged portion of a building,
Coverage B: demolition costs, and
Coverage C: increased costs of construction.
Building Ordinance or Law Coverage may be included in the property coverage form or obtained as an endorsement to the property insurance policy. The coverage is not required if it is not obtainable in the insurance market available to the association; and
Boiler and Machinery/Equipment Breakdown Coverage - This coverage is required if the project development has central heating or cooling. The coverage amount must equal the lesser of $2 million or the replacement cost value of the building(s) housing the boiler or machinery. This coverage may be included in the property coverage form, obtained as an endorsement to the master property insurance policy, or the HOA or co-op corporation may purchase a stand-alone boiler and machinery policy.
Note: Boiler and Machinery/Equipment Breakdown Coverage may also be referred to as Steam Boiler Coverage or Mechanical Breakdown Coverage.
Special Coverage Requirements for Condo Projects
Master property insurance policies for condo projects must be endorsed with a Condominium Association Coverage Form or its equivalent. The endorsement must include the following provisions or comparable language:
Recognition of an Insurance Trustee: If you name an insurance trustee, we will adjust losses with you, but we will pay the insurance trustee. If we pay the trustee, the payments will satisfy your claims against us.
Waiver of Rights of Recovery: We waive our rights to recover payment from any unit-owner of the condominium that is shown in the declarations.
Unit-owner's Insurance: A unit-owner may have other insurance covering the same property as this insurance. This insurance is intended to be primary, and not to contribute with such other insurance.
Builder/Developer Property Insurance Policies
When a project is under development, it may be covered by the builder/developer's property insurance policy if the policy provides equivalent coverage to the requirements for project developments in this topic. When property coverage ceases per the terms of the builder/developer's policy, the HOA or co-op corporation must obtain a master property insurance policy in accordance with Fannie Mae's requirements.
Separate projects under development by the same developer will be considered affiliated during the period when control of the project has not yet transferred from the builder/developer to the individual owners or related HOA or co-op corporation. The affiliated status of the subject project ends when the property coverage ceases per the terms of the builder/developer's policy.
Policies Covering Multiple Projects
Except as described below, unaffiliated projects may not share a master property insurance policy. Each project must maintain its own policy that meets Fannie Mae requirements, as detailed throughout this topic.
If a property insurance policy that covers multiple unaffiliated projects provides a dedicated coverage amount for each individual covered project, the policy structure may provide equivalent coverage to Fannie Mae's coverage amount requirements. The coverage amount dedicated to the subject project must be sufficient to cover the full replacement cost value of the project improvements including the common elements and residential structures.
The lender or servicer must review the insurance policy and any other associated documents needed to adequately evaluate the insurance coverage. The HOA or co-op corporation must be protected in the same manner as if it maintained a master property insurance policy. The coverage of each insured project cannot be affected by any actions or omissions of unaffiliated projects covered by the same policy. Additionally, all other master property insurance requirements for project developments must be met.
The lender or servicer must document how they determined the applicable policy provides acceptable coverage as detailed above. A copy of the policy, along with the lender's or servicer's documentation must be maintained in the loan file.
