Fannie Mae and Freddie Mac Changes to Insurance Requirements for Condominiums

By Richard S. Ekimoto, Esq.

A few weeks ago, we posted about Fannie Mae & Freddie Mac Changes in its Reserve Requirements for Condominium Associations. Fannie Mae and Freddie Mac also made some other changes related to insurance requirements for condominium projects. These changes include:

• Limits on Master Insurance Policy Deductibles for Condominium Projects
• Updated Replacement Cost Coverage Requirements for Master Insurance Policies for Condominium Projects
• Requirements for Unit Owner Insurance Policies in Condominium Projects

Deductibles for the Master Insurance Policy

Fannie Mae and Freddie Mac has established a limit for the deductible on the Association’s Master Policy. The “maximum allowable per unit deductible for all required property insurance perils covered by a master property insurance policy is $50,000 per unit.” Lenders are encouraged to implement this requirement immediately, but no later than July 1, 2026. In addition, Fannie Mae and Freddie Mac have stated that if the Master Policy has a per unit deductible, the Unit Owner will need an owner’s insurance policy (see below under the section, “Unit Owner Insurance”). Since some insurers providing condominium association insurance policies have started including a per unit deductible in addition to an occurrence deductible, this change is of particular importance to condominium associations.

Replacement Cost Coverage Under Master Insurance Polices

The Condominium Property Act in HRS §514B-143(a)(1)(C) mandates that condominium associations must maintain a property insurance policy “in a total amount of not less than the full insurable replacement cost of the insured property, less deductibles, but including coverage for the increased costs of construction due to building code requirements, at the time the insurance is purchased and at each renewal date . . . .” The Association’s Declaration or Bylaws can override that requirement, but that is rare. Having less than full replacement cost coverage often means that the condominium project will not qualify for loans from many lenders, including those under the Fannie Mae and Freddie Mac guidelines.

Last month, Fannie Mae and Freddie Mac provided some clarification for what lenders could rely on to determine whether the condominium association’s Master Insurance Policy meets the full insurable replacement cost coverage. In addition, Fannie Mae and Freddie Mac determined that the roofs of a condominium project needs to be insured, but they do not need to be insured on a replacement cost basis. These changes are effective immediately. However, condominium association should be aware that the provisions in their governing documents and in HRS §514B-143(a)(1)(C) continue to apply. Depending on the condominium association’s governing documents, an amendment may be necessary to obtain less than full replacement cost insurance for the association’s roofs.

Unit Owner Insurance

HRS §514B-143(g) allows the Board, with owner approval, to institute a policy to require each owner to maintain their own insurance policy¹. Even if the Association does not require owners to have their own insurance policy, Fannie Mae and Freddie Mac requires it of owners who wish to qualify for Fannie Mae and Freddie Mac loans in two situations:

• when any portion of the interior of the unit or improvements to the unit are not covered by the master property insurance policy, or
• when the master property insurance policy includes a per unit deductible.

The amount of the unit owner’s insurance policy is required to be at least equal to the greater of:

• an amount sufficient to cover any portion of the interior of the unit or improvements to the unit not covered by the master property policy in order to restore the unit to its condition prior to a loss event; or
• the amount of the per unit deductible, if the master property insurance policy has a per unit deductible.

Lenders are encouraged to implement these requirements immediately, but no later than July 1, 2026.

The second item for determining the amount of a unit owner’s insurance coverage is of particular interest to condominium associations. HRS §514B-143(d) authorizes the Board of Directors of a condominium association to allocate the deductible under the Association’s insurance policy:

• as a common expense;
• to the owners who caused the damage or from whose units the damage or cause of loss originated (but the Board must provide notice and an opportunity for a hearing to the owner); or
• to the unit owners of the units affected to pay the deductible amount.

In the second and third options, the Board can allocate the insurance deductible to the unit owner. We are aware that some unit owner insurers have pushed back on that practice. However, Fannie Mae and Freddie Mac are taking the position that lenders must verify that unit owners’ insurance covers the per unit deductible under the Association’s master policy. This may facilitate the ability of unit owners to obtain coverage for the amount of the Association’s insurance deductible at least in some situations.

1. These policies are sometimes referred to as HO6 insurance policies. ↩︎