Unit owner Mortgagee AI on HOA Polict?

[SpinsAgency]

For many years, I have never had an issue with any mortgage lender understanding that they cannot be added to a Condo Master Policy for the HOA since they do not have an insurable interest. I have never had a lender questions me more than once. I explain the issue and they accept it and move on.

The last 3 days I have had a mortgage broker arguing with me regarding adding the lender for their buyer of an individual unit requiring to be added to the master policy as AI/Loss Payee. Since I have not had so much push back in many years, I decided to reach out to the underwriters for both the Condo propert and GL policies. They both responded with the explanation that the unit owners lender has zero insurable interest as the association is not borrowing the money. I completely agree with both of them, but the mortgage broker still won't accept our explanation.

Their question is, how is the lenders interest protected? I'm not sure how to address this question specifically. I have explained that the unit owner is borrowing money to buy a box of air. Unless the unit owner is responsible for some of the building items (which they are not), the lender has no rights to the unit owners contents or to the master policy. The association didn’t borrow the money. The only thing I can do is issue an evidence of property insurance (which I have done). Again, The lender cannot be added as an additional insured to the Master policy as they do not have an insurable interest.

Now I do know most HO6 policies will only cover $1,000 as a limit unless the unit owner indicates more. The unit owner would need to determine how much it would cost to replace the unit items they are responsible for, such as flooring, wall coverings, lighting fixture, plumbing fixtures, cabinets, built in appliances, and any and all owner installed improvements.

But this amount will most likely not reach the full amount of the mortgage. So how do I answer the question regarding how is the lenders interest protected? Are lenders that lend for condos never fully protected?

Thanks in advance for any help!

 

[adjusterjack]

The mortgage broker is an ***. If he is not actually an employee of a lender I suggest you tell your client to find another mortgage broker.

The actual lender will know better.

 

[SpinsAgency]

The mortgage broker is an ***. If he is not actually an employee of a lender I suggest you tell your client to find another mortgage broker.

The actual lender will know better.

An *** is putting it lightly! You should hear the voicemails and read the emails I received from them demanding I have to do this and that I am going to be the cause of it not closing. Threatening me with the attorneys. It has been insane!

Still trying to find an answer though on their question of how is the lender protected since the HO6 doesn't cover the entire mortgage amount...

 

[adjusterjack]

Still trying to find an answer though on their question of how is the lender protected

The lender is listed on the policy as loss payee. Any claim that involves covered structural damage to any part of the "unit" (flooring, interior walls, ceilings, cabinets, fixtures, built-ins, drywall, paint) will result in the insurance company issuing a check made out to the lender and the insured.

The lender will require the insured to endorse the check and send it to the lender for handling. The lender is likely to put it in the escrow account and dole it out to the insured as the repairs get done. The lender might also want an inspections before it releases any money.

I have explained that the unit owner is borrowing money to buy a box of air. Unless the unit owner is responsible for some of the building items (which they are not),

Actually, you are wrong about that. Read the definition of "unit" in your client's CC&Rs and you'll find that he is not buying just a box of air. He's buying a portion of the building itself. All of those items I mentioned above are your client's responsibility if they get damaged.

Now read your unitowner's (HO-6) policy booklet. It doesn't cover just contents, it covers the dwelling, too.

A condo could easily have $50,000 and up in dwelling related items that the association master policy doesn't cover.

Are lenders that lend for condos never fully protected?

Lenders that lend for any real estate are never fully protected. If a person borrows $500,000, spends $100,000 on land, puts up a $400,000 house, and buys $400,000 worth of insurance because land is not covered, the lender is not "fully" protected and the lender knows that.

What does your client have to say about all this?

 

[SpinsAgency]

My client is actually the Association, not the Unit Owner.

So yes, the HO6 will list the lender and the unit owner would have to increase Coverage A for anything inside and improvements on top of contents. But their argument is they have to be listed on the Condo Master Policy in order to be secured for the building, which they have no rights to since the Association is not borrowing the money and they own the actual building not the unit owner.

I am assuming they have finally taken my explanation as fact since I have not heard from them today.

 

[adjusterjack]

But their argument is they have to be listed on the Condo Master Policy in order to be secured for the building, which they have no rights to since the Association is not borrowing the money and they own the actual building not the unit owner.

Turns out that what you are going through is very common. I googled it and came up with a ton of hits.

This first one, if it hadn't been written in 2016, I would swear the question came from you:

Condo Associations and Additional Insureds: Who Belongs on the Policy?

Here's another article:

http://www.tmkrisk.com/wp-content/themes/kallman/resources/condos-and-additional-insured.pdf

That article alludes to some states having laws that prohibit it.

Even Fannie Mae doesn't require that a lender be named as loss payee on the master policy:

a copy of the current master policy and any endorsements, and a certificate of insurance showing the individual unit securing the mortgage loan is covered under the policy;

https://www.fanniemae.com/content/guide/servicing/b/2/03.html

More search results at:

condo unitowner's lender as loss payee on the association policy at DuckDuckGo

 

[SpinsAgency]

Yea I found a ton of articles as well. The Fannie Mae I was keeping in my back pocket for today if it continued.

 

[Brenda Payne]

Great thread! Thanks to all.

 

[marindependent]

The moment that someone brings up "Threatening [you] with attorneys"...I back out and /or just stop responding. But before - I tell the person threatening this that I have provided insurance documentation, as authorized by the insurer, up to the industry standard. And if they are not a licensed insurance agent or broker in a given state that their threats may constitute efforts to provide or amend insurance.

Lastly - I often confirm that they are not licensed to provide insurance?

Could you imagine if you pushed back on a mortgage broker about the terms and conditions that they provided to the client?

 

[Darvo]

For many years, I have never had an issue with any mortgage lender understanding that they cannot be added to a Condo Master Policy for the HOA since they do not have an insurable interest. I have never had a lender questions me more than once. I explain the issue and they accept it and move on.

The last 3 days I have had a mortgage broker arguing with me regarding adding the lender for their buyer of an individual unit requiring to be added to the master policy as AI/Loss Payee. Since I have not had so much push back in many years, I decided to reach out to the underwriters for both the Condo propert and GL policies. They both responded with the explanation that the unit owners lender has zero insurable interest as the association is not borrowing the money. I completely agree with both of them, but the mortgage broker still won't accept our explanation.

Their question is, how is the lenders interest protected? I'm not sure how to address this question specifically. I have explained that the unit owner is borrowing money to buy a box of air. Unless the unit owner is responsible for some of the building items (which they are not), the lender has no rights to the unit owners contents or to the master policy. The association didn’t borrow the money. The only thing I can do is issue an evidence of property insurance (which I have done). Again, The lender cannot be added as an additional insured to the Master policy as they do not have an insurable interest.

Now I do know most HO6 policies will only cover $1,000 as a limit unless the unit owner indicates more. The unit owner would need to determine how much it would cost to replace the unit items they are responsible for, such as flooring, wall coverings, lighting fixture, plumbing fixtures, cabinets, built in appliances, and any and all owner installed improvements.

But this amount will most likely not reach the full amount of the mortgage. So how do I answer the question regarding how is the lenders interest protected? Are lenders that lend for condos never fully protected?

Thanks in advance for any help!

Hello, I'm not very well-read in legal matters, even if I have the general knowledge I learned during my lifetime. Usually, every time I have a question, I consult swpdxlaw.com. Of course, it will be nice to know the basic stuff to know the answer right away. Even though I love to work with them, I think every job should be done by a specialist. If you need any recommendations from a professional, you should definitely contact them. I'm sure you'll find some great answers and maybe some tips or book recommendations.