The four gaps that fail a condo master policy at lender review

When a condo unit sale stalls at the lender insurance review, it is almost never a surprise to anyone who reads master policies for a living. The same four gaps come up again and again. None of them are exotic, and all four are checkable before a sale is ever under contract.

Gap one: actual cash value instead of replacement cost

The Fannie Mae Selling Guide, in section B7-3, requires the master property policy to cover 100 percent of the replacement cost of the project improvements for a conventional loan to be warrantable. A policy written on actual cash value deducts depreciation, and on an older building that deduction can be enormous.

This is the most fundamental gap, and it usually signals a deeper problem: the account was placed in a generalist habitational package priced for apartment ownership rather than in a dedicated community-association program. Confirm the valuation method reads replacement cost, and that the insured value tracks a current appraisal rather than an old number trended forward.

Watch the state angle here too. Several state statutes only require 80 percent of replacement cost or actual cash value, which is below the lender bar. Meeting the state minimum is not the same as being warrantable.

Gap two: an undersized or wrongly structured fidelity bond

For projects over 20 units, the Fannie Mae Selling Guide, in section B7-4-02, requires a fidelity or crime bond of at least three months of aggregate assessments plus the association reserve funds. Two things trip associations up.

First, the amount. Boards tend to set the bond to a flat number the prior agent chose and leave it there. As reserves grow, a static bond quietly falls below the required floor. Recompute it each renewal against current reserves and the current assessment roll.

Second, the managing-agent endorsement. If a management company handles the operating and reserve accounts, the bond has to be endorsed to cover that agent and its employees. This is the single most common fidelity gap: the association carries a bond sized correctly for its own board, but the agent who actually has custody of the money is not covered.

Gap three: missing flood coverage in a Special Flood Hazard Area

If any project building sits in a FEMA-designated Special Flood Hazard Area, the Fannie Mae Selling Guide requires flood insurance equal to the lesser of the National Flood Insurance Program maximum or the building replacement cost. Because FEMA revises flood maps over time, a building can move into the high-risk zone between reviews. Confirm each building against the current map, not a map from the last placement.

Gap four: a general liability limit below the floor

The project needs a general liability policy covering the common elements, commonly written in the one to two million per occurrence range with an umbrella layered above. The limit is often left at a legacy floor while the community, its amenities, and jury awards have all grown. Confirm the per-occurrence and aggregate limits, that all amenities are scheduled, and that an umbrella follows form over the correct underlying policies.

The practical takeaway

These four gaps are predictable, which means they are preventable. Running the master policy against them before a sale is under contract turns a last-minute scramble into a routine check. The Policy Checker walks the same four items, and the condo master policy overview covers the valuation-basis question that sits underneath gap one.