You purchased a condo, closed on the mortgage loan, and are now ready to move in to your new home. But what happens if a pipe bursts and floods your unit or an electrical short causes fire damage to your unit? Should you call the insurance company or your Condo Association? Are you covered by your Condo Association’s master policy of insurance? What kind of insurance is required under your mortgage? Are you required to have an HO-6 insurance policy? These important questions need to be answered before you move into your new home. In discussion of these questions, I will utilize Fannie Mae requirements as a guidepost as Fannie Mae is the largest mortgagor in the United States and its rules and guidelines are often used by other mortgagors.
First, does your Condo Association hold a Master Policy of Insurance (“Master Policy”) and, if so, does it cover your unit? Fannie Mae requires that your Condo Association maintain a master or blanket type of insurance policy. So, unless a mistake was made, you can assume that your Condo Association has a Master Policy and it will likely fall under one of these categories: 1) Single Entity; 2) All-In; or 3) Bare Walls. Fannie Mae provides the following definition and requirements for these policy types:
“Single Entity” policy: The policy must cover all of the general and limited common elements that are normally included in coverage. These include fixtures, building service equipment, and common personal property and supplies belonging to the HOA. The policy also must cover fixtures, equipment, and replacement of improvements and betterments that have been made inside the individual unit being financed. The amount of coverage must be sufficient to restore the condo unit to its condition prior to a loss claim event. If the unit interior improvements are not included under the terms of this policy type, the borrower is required to have an HO-6 policy with coverage, as determined by the insurer, which is sufficient to repair the condo unit to its condition prior to a loss claim event.
“All-In” (sometimes known as an “all-inclusive”) policy: The policy must cover all of the general and limited common elements that are normally included in coverage. These include fixtures, building service equipment, and common personal property and supplies belonging to the HOA. The policy also must cover fixtures, equipment, and replacement of improvements and betterments that have been made inside the individual unit being financed. If the unit interior improvements are not included under the terms of this policy type, the borrower is required to have an HO-6 policy with coverage, as determined by the insurer, which is sufficient to repair the condo unit to its condition prior to a loss claim event.
“Bare Walls” policy: This policy typically provides no coverage for the unit interior, which includes fixtures, equipment, and replacement of interior improvements and betterments. As a result, the borrower must obtain an individual HO-6 policy that provides coverage sufficient to repair the condo unit to its condition prior to a loss claim event, as determined by the insurer.
You will notice a common theme which I have put in italic font, an HO-6 policy of insurance is required by Fannie Mae when the Master Policy does not cover the interior improvements to your condo unit. Similar to gap insurance on a new car, an HO-6 Policy should cover what is missing from the Master Policy.
Relying solely on the Master Policy, can result in two major problems: 1) your interior improvements are probably not covered; and 2) you may be in violation of the requirements within your mortgage. So, not only is it possible that you are not fully covered but, you could be violating the terms of your mortgage, which could result in penalties up to and including foreclosure.
To avoid these issues, you have to be your own advocate and you have to become familiar with your insurance policy and mortgage requirements. If you are required to, but do not have an HO-6 policy of insurance, you could lose everything, including your mortgage. Knowing what your Master Policy covers and what your mortgage company requires is paramount for happy condo ownership.
