Compliance Issues with Fannie Mae

With community association property deductibles on the rise, compliance with lending requirements has become increasingly challenging. Loans supported by Fannie Mae and Freddie Mac include specific insurance guidelines for community associations, one of which limits the property deductible to no more than 5% of the total insurable value. While some associations with deductibles of $50,000 or $100,000 per occurrence may still meet this requirement, issues often arise when per-unit deductibles are implemented for perils such as water damage. For example, an association carrying a $25,000 per-unit deductible may be deemed non-compliant, potentially affecting the eligibility of buyers seeking conventional financing. Lowering deductibles to meet lending standards is not always a viable solution, as it increases risk to insurance carriers and may lead to significantly higher premiums. A creative approach adopted by some insurers is the use of a maximum aggregate deductible, where the carrier calculates the 5% threshold of the total insurable value and caps the deductible accordingly within the policy. This strategy allows associations to maintain competitive insurance terms while remaining compliant with lender requirements. Additionally, borrowers may pursue a Project Waiver Request (PWR) to seek an exception when a deductible exceeds allowable limits. Proactive coordination between boards, management, lenders, and insurance professionals is essential to address these compliance challenges effectively.

Loss Prevention: Sprinkler Head Breaks

A broken sprinkler head can release a significant volume of water in a matter of minutes, resulting in extensive property damage and costly insurance claims. Sprinkler heads may break due to freezing temperatures, maintenance activities, or accidental impacts when residents move furniture or stored items. Although knowing the location of water shut-off valves is helpful, delays can still occur while waiting for qualified personnel to respond. A proactive solution is the installation of sprinkler guards, which protect the heads from accidental contact while still allowing proper water distribution in the event of a fire. Consulting with a local fire suppression company can help associations plan and implement this preventative measure. Including such improvements in the reserve study is also a practical way to budget for the project. Preventative actions like these not only reduce the likelihood of losses but also support more favorable insurance renewal negotiations.

Owners’ Curious Question: How Do I Insure the Association’s Deductible as an Owner?

It is common for governing documents to assign responsibility for the association’s property deductible to individual unit owners when a loss originates within their unit. Owners can insure this exposure through their personal homeowner policy. In shared-wall communities, an HO-6 policy is typically recommended, with the dwelling coverage limit set to at least the amount of the association’s deductible. For example, if the association carries a $25,000 deductible, the owner should maintain a minimum of $25,000 in dwelling coverage, with additional limits recommended to provide a financial cushion for items not covered by the association’s policy. For owners who rent out their units, the deductible responsibility remains with the owner and cannot be transferred to the tenant. However, landlords should require tenants to obtain an HO-4 renters policy to cover personal property and liability exposures. Including this requirement in the lease agreement and listing the association as an additional interest can further strengthen risk management practices.

Update of the Month: AC Filters

Maintaining air conditioning systems is essential, particularly during the warmer months when cooling systems are used more frequently. One of the simplest and most effective ways to prevent water damage from AC units is by regularly checking and replacing air filters. In most communities, this responsibility falls to the unit owner, yet it is often overlooked. Clogged or dirty filters can lead to system inefficiencies, condensation buildup, and potential water leaks that may affect not only the individual unit but also neighboring units in stacked configurations. Replacement filters are inexpensive and readily available at local hardware stores, and heating and cooling contractors can provide additional assistance if needed. Regular maintenance of AC filters is a straightforward preventative measure that helps avoid unnecessary insurance claims and supports the overall safety and functionality of the community.