(from FannieMae’s Sellers Guide – Chapter B7-3, “Property and Flood Insurance”)
By: Timothy Cline
Effective February 7, 2024. There are 6 changes being implemented to better align with FreddieMac Seller Guide – Section 4703.2 – “Minimum Property Insurance Types and Amounts”. If the coverage you currently have in place does not meet these new requirements, please contact us to see about getting quotes for additional coverage.
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.
(“BASIC” Coverage Form is 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, which must include the following perils: fire, lightning, explosion, windstorm, hail, smoke, aircraft, vehicles, riot, civil commotion, vandalism, sprinkler leakage, sinkhole, volcanic action, falling objects, weight of snow, ice or sleet, 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.
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 maximum allowable deductible for all required property insurance perils is 5% of the master property insurance coverage amount. 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.
Lenders must comply with these clarified policies as soon as possible but are required to do so for all loans with application dates on or after June 1, 2024.