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SHOULD HOA INSURANCE
BE PRIMARY?
 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.
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.
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.
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.
Many thanks to Timothy Cline, CIRMS, President of the Timothy Cline Insurance Agency, Inc. and Dorothy McCorkindale, CPCU,
Senior Vice President of Wells Fargo Insurance Services USA, Inc. for their assistance with this question.
FEEDBACK
Cabin #1. Loved your response [to corruption everywhere]! -P.C.
 Cabin #2.
Right on! I would like to suggest N. Dakota to many owners at my
complex. Many people are not suited for this type of living--parking on
lawns, purple drapes, trash cans out 7 days a week, barking dogs, etc.,
etc. -Gloria F.
Cabin #3. The
email and U.S. mail requirement struck at the heart of my main complaint
about the California Legislature and court system which is the constant
nit-picking requirements of this nature. I've just completed a 4-year
stint on a board of directors and the amount of money wasted to comply
with these sort of regulations is mind-boggling. Do you have an address
for that cabin in N. Dakota? I'd like to take a look. -David A.
Cabin #4. Perhaps if we had a state agency that had
authority to enforce the Davis-Stirling Act we would have no more
problems with power hungry directors, money hungry attorneys and no more
bad debt collectors? If the Attorney General could enforce the
Davis-Stirling Act, problems would go away since it would be a crime to violate the laws. Of course only those who really
cared about serving their community would then seek election. If no one
wanted to serve then their association could be dissolved and the common areas would be turned over to the city
or county. -B. Stelter
RESPONSE:
Oh, my. Not all HOAs are evil, not all boards are corrupt, not all
lawyers are money hungry, and not all owners are angels. Moreover, a
state agency will not produce utopia. Unlike slow moving, indifferent,
state bureaucracies, HOAs are more
responsive to the needs of their members, run lean and pass balanced budgets. HOAs have their flaws but most owners are generally satisfied with how they're run. Also, governmental agencies are unwilling to assume the maintenance obligations for an association's common areas.
Cabin #5.
Although K.L.'s frustration is evident, there is a valid point being
made, and it is usually resolved only through legal means which are
generally costly. This makes homeowners feel impotent to change BOD
actions. We found that having more owner involvement and presence at
meetings is a good way to keep the BOD mindful of their duties and the
fact that they represent everyone. Getting owners involved is no easy
task; however, if they become aware that their "pocketbooks" are
affected, they become more interested. -C.W.
Late Newsletter.
You
have us hooked Adrian....I
searched my spam folder this morning in search of your newsletter fearing I'd
missed it. Thanks
for keeping it up, no matter when they appear. -Carey C.
RESPONSE: Sorry for the late arriving newsletter. We are going through a major network upgrade that has been a little bumpy.
Newsletter.
Adrian, absolutely love your newsletters. BTW do you live in our HOA?
it seems every issue we have you know more about it than we do!!!! -John
M.
RESPONSE:
Thank you for your kind words. I could say that I see all and know all
but then all the conspiracy nuts would put tinfoil on their heads and
bury me with emails.
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Adams Kessler PLC. Readers should not act on issues raised in our newsletters or website without consulting legal counsel. |
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