During the 2011 session of the Maryland General Assembly, the legislature amended the Maryland Condominium Act to enable condominiums to adopt amendments to their governing documents that would require individual unit owners to secure and maintain insurance policies covering their individual units (commonly known as HO-6 policies), and to provide evidence of such insurance to the condominium. Whereas the approval of owners having at least 66-2/3% of the total percentage interest in a condominium is generally required for a condominium to amend its bylaws, this legislation permits a condominium to adopt such a bylaw amendment with the approval of owners representing just a simple majority of votes in the condominium (i.e. the affirmative vote of owners having 51% of the total percentage interest). Following in Maryland’s footsteps, Fannie Mae now requires its borrowers to obtain HO-6 policies with coverage sufficient to restore the unit to its condition prior to a loss.
In the wake of Fannie Mae’s policy change, if a borrower wants to purchase a condominium unit, and the lender providing financing to purchase the unit is subject to Fannie Mae’s guidelines, the borrower must obtain HO-6 coverage on the improvements and betterments within the unit. Although the Fannie Mae policy only applies to FHA loans commenced on or after January 1, 2012, the statutory change made by the General Assembly empowers a condominium to require current and future owners who are not financed through FHA to obtain this type of coverage by amending its governing documents to require all unit owners to secure and maintain HO-6 policies for their units. Unit owners who purchase the typical HO-6 policy are covered not just for the physical premises—including improvements and betterments made by the owner—but also for that portion of the condominium’s master insurance policy’s deductible that can be charged back to the unit owner when the loss covered by the master policy originates in the unit (currently no more than $5,000.00 in Maryland pursuant to Section 11-114 of the Maryland Condominium Act).
The Fannie Mae policy change also affects D.C. condominiums because Fannie Mae administers FHA-insured lending there as well as in Maryland. Presently, the D.C. Condominium Act neither requires owners to obtain individual insurance coverage on the improvements and betterments within the unit, nor does it mandate that a unit owner obtain insurance coverage to protect him from the responsibility for any portion of the deductible that may be incurred for losses adjusted by the condominium’s master insurance policy carrier. Accordingly, D.C. condominiums can and should amend their governing documents to add these requirements.