Community Associations Institute (CAI) encourages the secondary mortgage market to implement the addition of an insurance trustee endorsement requirement for community association property insurance policies for new projects to provide protection to the assets of the community association in the event of a major catastrophe. CAI opposes any federal agency involved with the approvals or any other secondary mortgage entity as a loss payee on a community association insurance policy.
The concern is to enable insurance proceeds to be appropriately applied and in the association’s interest to restore property after a major catastrophe. CAI, an organization dedicated to the protection, preservation and enhancement of community association housing, recognizes and appreciates a federal agency’s desire to protect its mortgage loans and its determination not to be the "insurer of last resort" of property damaged on a mass scale by major catastrophes such as earthquakes, floods, volcanic eruptions, fires and other physical calamities. CAI also believes that naming a governmental agency as a loss payee on each association policy will detrimentally affect residential communities and other groups involved with such communities and fail to recognize the fundamental nature and structure of community associations. In addition, a dramatic reduction in the availability of private insurance for community associations may be a direct result. Involving a federal agency in the claims process will also lengthen the time to complete the repairs. Higher claims’ costs may occur which will ultimately increase premiums.
Historically, Freddie Mac, for example, sought to be named as a "loss payee" on community association policies to assure that a Freddie Mac representative controlled the expenditure of insurance proceeds, either to rebuild a property, or at that representative's choice, to pay down the mortgage investment made by Freddie Mac.
CAI's Insurance and Risk Management Committee believes that a reasonable compromise can be found in the naming of an insurance trustee for property policies held by condominiums, cooperatives and planned communities that insure on a blanket basis. Such trustees are currently required in certain states and in certain CC&Rs and can be charged with and expected to adjust any loss in accordance with the CC&Rs of the particular association. CAI endorses and supports the concept that an insurance trustee be named for each association. In most circumstances, that trustee can be the Board of Directors so it can manage itself. When the loss exceeds 10% of the insurable replacement cost or $1,000,000, whichever is greater, the association must select an independent trustee. That trustee can be a professional other than a public adjuster, such as a CPA, PE or Certified Construction Manager.
CAI, therefore, urges the secondary mortgage market to consider naming an insurance trustee as a mechanism that appropriately protects its interests while also providing community associations with the control that is responsive to their interests. Such a mechanism is already in use and routinely included in the CC&Rs of community association in several states and is acceptable to the insurance industry in those states. Most insurance providers to community associations have a national presence. This will facilitate expanding the use of insurance trustees to those insurers other jurisdictions and should facilitate the availability of insurance to all residential communities. CAI encourages members of the insurance industry to support and cooperate with this approach.
CAI further recommends to the insurance industry that the cost of this insurance trustee clause be an extension of coverage as long as the community association does not use a public adjuster. CAI also recommends that the insurance trustee have a meaningful role in property reconstruction and that any fees charged be capped at some reasonable amount. CAI also volunteers its assistance and expertise to the development of appropriate policy language to achieve this goal and to persuade insurers to use and accept such an endorsement.