association's insurance be primary and if so should the CC&Rs
be amended to state that?
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
. The Federal National Mortgage Association (Fannie Mae) is the nation's largest player in the
market. Fannie Mae
differently than FHA; instead of insuring loans, it buys FHA insured
loans from lenders. To qualify, Fannie Mae 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.
Rebuilding Common Areas
. The HOA's
insurance pays for rebuilding the common area elements surrounding
the condominium in the event there is a major loss. Without the
surrounding structure, the condominium (which is air space) has very
little value. If the common areas are not rebuilt, the borrower will
likely walk away from the loan and the lender will foreclose on useless
air space. Lenders want to make sure HOAs
have the funds they need to repair and rebuild the common area
structure. Hence, the requirement by Fannie Mae
that the association's policy be primary. As a result, lenders who sell
their loans to Fannie Mae will refuse to lend in
developments where the association's insurance is not primary.
Laws Are Silent
California's Civil Code and Insurance Code are both silent on the HOA’s
master policy being primary, it is up to boards and insurance agents to
address the issue. Many of the better master policies specifically
drafted for condominium associations already have the “primary” language
built in but there are plenty of other carriers that do not have the
Making the association's insurance primary eliminates another problem--the 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:
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.
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
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
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
: 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. ASSISTANCE
: Associations needing legal assistance can contact us
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