Freddie Mac Single-Family Seller/Servicer Guide 4703.2 — Minimum required property insurance types and amounts

This section contains requirements related to: ■ 1- to 4-unit properties ■ Projects (Planned Unit Developments (PUDs), Condominium Projects, Cooperative Projects and ground lease communities) ■ Interior unit owner policies (commonly known as HO-6) (a) 1- to 4-unit properties (i) Peril requirements At a minimum, the insurable improvements on the Mortgaged Premises must be insured for loss or damage from: ■ Fire ■ Lightning ■ Windstorm (including named storms designated by the U.S. National Weather Service or the National Oceanic and Atmospheric Administration by a name or number) ■ Hail ■ Explosion ■ Riot ■ Civil commotion ■ Aircraft ■ Vehicles ■ Smoke If any of the preceding perils is excluded from the primary insurance policy, coverage of the excluded peril must be provided through a secondary insurance policy. (ii) Deductible requirements The deductible(s) for the above perils may not exceed 5 percent of the limit maintained for dwelling coverage. (iii)Coverage sufficiency requirements The property securing the Mortgage must be covered by an insurance policy that provides for coverage on a replacement cost basis, excluding roofs. Roofs must be insured but do not have to be covered on a replacement cost basis. Note: Freddie Mac recognizes that some insurers may issue policies that provide coverage on an actual cash value basis for personal property and structures that are not buildings. In the event that the Seller/Servicer sees such terms in a property insurance policy covering a 1- to 4-unit property, this is acceptable. The Seller/Servicer must ensure that adequate insurance coverage remains in force when the improvements are vacant or unoccupied and must notify all insurers of any such change in occupancy in order to preserve its rights as mortgagee under the applicable insurance policy. (b) Projects PUDs, Condominium Projects, Cooperative Projects and ground lease communities) Insurance requirements for projects are determined by the project type and its Project Documents. For this Section 4703.2(b): ■ “Project Documents” includes the ground lease for ground lease communities and Cooperative Project Documents for Cooperative Projects ■ “Residential structures” refers to the insurable elements of a building that contains one or more residences, exclusive of Common Elements (i) Master property insurance When the Project Documents require a master property insurance policy to cover both the Common Elements and residential structures, the policy must meet the requirements of this section. If the master policy does not insure the interior of a unit or improvements within the unit (the fixtures, improvements, alterations and equipment within the individual units), or when otherwise required due to a master policy per unit deductible, the Borrower must obtain an HO-6 unit owners policy. See Section 4703.2(c) for HO-6 policy requirements.

(A) Coverage sufficiency requirements for projects (I) PUDs and ground lease communities The master property insurance policy coverage limit must be at least equal to 100% of all the residential structures’ replacement cost value (RCV) estimates. Seller/Servicers are not required to verify if a master insurance policy for a PUD or ground lease community provides insurance for Common Elements, except as otherwise required for a master or blanket insurance policy for multiple unaffiliated projects. (II) Condominium and Cooperative Projects The master property insurance policy coverage limit must be at least equal to 100% of the RCV estimate of the project's improvements, including Common Elements and residential structures. Evidence of coverage sufficiency: To meet the requirements of either (I) or (II) above, Seller/Servicers may rely on one of the following options to evidence that a master property insurance policy meets the applicable coverage sufficiency requirements: ■ The insurance policy includes a guaranteed replacement cost or equivalent endorsement ■ The insurance policy includes an extended replacement cost or equivalent endorsement ■ The RCV estimate amount used by the insurance carrier to determine coverage limits ■ The project’s insurance risk appraisal, or ■ A statement from a property insurer, an independent insurance risk specialist or other professional with appropriate expertise to make such a determination

(B) Loss settlement requirements The master property insurance policy must provide for coverage on a replacement cost basis, excluding roofs. Roofs must be insured but do not have to be covered on a replacement cost basis. Note: Freddie Mac recognizes that some insurers may issue policies that provide coverage on an actual cash value basis for personal property and certain property elements. In the event that the Seller/Servicer sees such terms in a master property insurance policy covering a project, this is acceptable.

(C) Peril requirements The master property insurance policy must be written on a special coverage form or equivalent.

(D) Additional coverage requirements The homeowners association (HOA), Cooperative Corporation, or fee simple landowner/lessor must also obtain the additional coverage described below, as applicable: (I) Building ordinance or law coverage The coverage must include: ■ Coverage A: Loss to the undamaged portion of a building ■ Coverage B: Demolition costs, and ■ Coverage C: Increased costs of construction Building ordinance or law coverage is not required if the building(s) are legally conforming under current building, zoning or land use laws or if the coverage is not available. (II) Equipment breakdown coverage Steam boiler and machinery or equipment breakdown coverage is required if a building in the project has a central heating ventilation and cooling system and the coverage is available in the insurance market. The insurance limit per covered mechanical breakdown or equipment failure must equal the lesser of: ■ 100% of the replacement cost of the building housing the equipment, or ■ $2 million (III) Condominium Projects only In addition to the requirements above, Condominium Projects must maintain a Condominium Association Coverage Form or its equivalent, including the following provisions or comparable language: ■ Recognition of an Insurance Trustee (e.g., “If you name an insurance trustee, we will adjust losses with you, but we will pay the insurance trustee. If we pay the trustee, the payments will satisfy your claims against us.”) ■ Waiver of Rights of Recovery (e.g., “We waive our rights to recover payment from any unit-owner of the condominium that is shown in the declarations.”) ■ Unit-owner’s Insurance (e.g., “A unit-owner may have other insurance covering the same property as this insurance. This insurance is intended to be primary, and not to contribute with such other insurance.”)

(E) Deductible requirements The master property insurance policy deductible(s) for all perils required by Section 4703.2 may not exceed 5% of the limit maintained for building(s) coverage per occurrence. If the master property insurance policy includes a per unit deductible, the deductible may not exceed $50,000 per unit. The HOA, Cooperative Corporation or fee simple landowner/lessor may purchase a deductible buy-back insurance policy to meet Freddie Mac's deductible requirements, provided the policy meets all other applicable property insurance requirements in Chapter 4703.

(F) Master or blanket insurance policy for multiple unaffiliated projects Mortgages secured by units in a PUD or Condominium Project with a master or blanket insurance policy that combines insurance coverage for multiple unaffiliated PUDs or Condominium Projects are eligible for sale to Freddie Mac, provided that: ■ Each covered PUD or Condominium Project has a dedicated policy limit and a specific dedicated deductible that does not exceed the requirements above ■ The policy clearly states that each association is a named insured ■ The policy limit covers the full replacement cost required for the Common Elements and, to the extent required, the units, as of the current insurance policy effective date; and ■ The insurance policy meets all requirements of Chapter 4703 and other Purchase Documents applicable to master insurance policies covering PUDs and Condominium Projects. Projects that are under the same master association and/or share the use of common facilities, whether those facilities are individually owned or owned as part of a master association or development, are considered to be affiliated projects. Multiple projects that do not meet one of these criteria, even if they are under the management of the same management company, are not considered to be affiliated projects. (ii) Individual unit coverage for residential structures In lieu of a master policy covering the residential structures, individual unit owners or shareholders in a project may insure their residential units individually when the insurance meets the requirements in Section 4703.2(a), above, including: ■ PUD units ■ Cooperative Units, when permitted by the Project Documents ■ Condominium Units, when permitted by the Project Documents ■ Ground lease community residences similar to 1- to 4- unit properties Note: This guidance refers to interior and exterior unit coverage issued under a standard homeowners insurance policy, not interior unit policies (commonly known as HO-6). See Section 4703.2(c) for interior unit owner policy requirements. Condominium and cooperative associations must continue to insure Common Elements as well as fixtures, machinery, equipment and supplies maintained for the service of the project for at least 100% of their RCV estimate, and the policy must meet all other requirements of Section 4703.2(b)(i) above. However, the Seller/Servicer is not required to verify Common Element coverage for PUDs or ground lease communities, except as otherwise required for a master or blanket insurance policy for multiple unaffiliated projects. (c) Interior unit owner policies (commonly known as HO-6) (i) Determining when an interior unit owner property insurance policy in a project development is required The Seller/Servicer must document that the Borrower has an HO-6 unit owner policy when the master property insurance policy: ■ Does not cover all or any portion of the interior of the unit or the improvements to the unit, or ■ Includes a per unit deductible (ii) Coverage sufficiency requirements The interior unit owner policy coverage limit amount must be at least equal to the greater of: ■ The amount sufficient to repair the unit to at least its condition prior to the loss, or ■ The amount of the per unit deductible, if the master property insurance policy includes a per unit deductible (iii)Peril requirements At a minimum, the insurable improvements on the Mortgaged Premises must be insured for loss or damage from: ■ Fire ■ Lightning ■ Windstorm (including named storms designated by the U.S. National Weather Service or the National Oceanic and Atmospheric Administration by a name or number) ■ Hail ■ Explosion ■ Riot ■ Civil commotion ■ Aircraft ■ Vehicles ■ Smoke Additionally, if a master property insurance policy includes a per unit deductible, then the interior unit owner policy must include coverage for all applicable perils to which the per unit deductible applies. If any of the preceding perils is excluded from the primary insurance policy, coverage of the excluded peril must be provided through a secondary insurance policy. (iv) Loss settlement requirements Interior unit owner policies must provide for coverage on a replacement cost basis. (v) Deductible requirements The interior unit owner policy deductible(s) cannot exceed the greater of 5% of the coverage limit or $2,500.