SHOULD HOA INSURANCE
QUESTION: Should the association's insurance be primary and if so should the CC&Rs be amended to state that?
ANSWER: There is no law that requires an association's insurance be primary. If your governing documents are silent, then it depends on whether the board wants to expand the pool of potential buyers of condominiums in the development. If so, associations must comply with Fannie Mae requirements.
Fannie Mae. The Federal National Mortgage Association (Fannie Mae) is the nation's largest player in the secondary mortgage market. Fannie Mae operates differently than FHA; instead of insuring loans, it buys FHA insured loans from lenders. Before it will buy those mortgages, Fannie Mae now requires that an association's master policy be “primary.” Doing so protects lenders who often rely on the association's insurance to protect their collateral, i.e., condominiums that secure their loans. As a result, lenders who sell their loans to Fannie Mae in the secondary market will refuse to lend in developments where the association's insurance is not primary.
Overlapping Insurance. Making the association's insurance primary eliminates the difficult issue of overlapping insurance. One of the many problems with poorly written CC&Rs is when two policies (owner and HOA) cover the same property. Whenever this occurs there is the risk that insurers will invoke their "other insurance" clause. Following is a typical clause:
Other Insurance. If a loss covered by this policy is also covered by other insurance, except insurance in the name of the condominium, we will pay only our share of the loss. Our share is the proportion of the loss that the applicable limit under this policy bears to the total amount of insurance covering the loss.
When carriers invoke this provision, loss payments get bogged down or stalemate as carriers argue over coverage and their proportional share. This can be avoided with the following solutions:
1. Amend CC&Rs.
a. Maintenance Defined. HOA CC&Rs should clearly define the maintenance duties of members and the association, especially when it comes to exclusive use common area.
2. Policy Language. If an association’s CC&Rs are silent as to which policy is primary (owner or HOA) and amending the CC&Rs is too difficult, insurance purchased by boards can always be more stringent than the CC&Rs require, just not less. Thus, boards can require that the association's policy be written to be "primary," thereby satisfying Fannie Mae guidelines.
b. Insurance Defined. CC&Rs should clearly define the insurance obligations of members and the association. When there is clarity, insurers can easily fulfill their coverage duties.
c. Primary Defined. CC&Rs should designate the association's policy as “primary” so the association pays first, regardless of any other insurance covering the same risk.
RECOMMENDATION: If associations want access to an expanded pool of buyers, they need to make their insurance primary. Because of the ever-changing FHA, Fannie Mae and Freddie Mac standards, boards should use insurance brokers who specialize in homeowner associations. In addition, boards should have legal counsel review and, if appropriate, amend CC&R maintenance and insurance provisions for membership approval.