In selling a condo which is a typical unit in a four unit building, the buyer's mortgage company is asking for them to be added as a payee on the condo association's master insurance policy. Is this a normal request and what is the reasoning behind it when the buyer will have their own insurance for the unit? The head of the condo board was skeptical of it and had not heard of such a thing.
I wouldn't say it's normal since it isn't expected, but it's not abnormal either; it's happened to me as well. In my case I already had the mortgage and years later they asked for this. When I asked my condo association if this was possible, they referred me to the Master policy insurance company and they said they could provide a certificate of insurance, but probably wouldn't be able to add my lender as an additional insured, and I never followed up with them to find out for sure. My condo association has over 200 units; can you imagine the paperwork if every lender asked for it? I ended up just ignoring the request and the bank didn't ask again. I had the luxury of doing this since I already had the mortgage.
I would suggest contacting the master insurance policy company. In a small 4 unit complex I could see them being willing to provide the document, and it doesn't hurt to ask.
Disclaimer: Conjecture Below:
I believe the reason some lenders request this is because they want to know insurance coverage exists for the full value of the condo. This is pretty straight forward in a single family home: if the home is worth $100K and the mortgage is for $80K, they want to see a home owners insurance policy that covers $100K for the structure in case of a total loss. In a condo with the same $80K loan, the condo unit insurance policy may only cover $25K in structure, and the master insurance policy would cover the rest. Adding the lender as an additional insured on the master insurance policy would have two benefits:
- Ensure that notice is provided to the lender if the master policy lapses or is modified. This is one of the benefits provided to those listed as additional insured (and also the notification only listing called "additional interest").
- Allow the bank to "show" coverage for the full value of the condo. This is a little weird since in larger complexes the master policy coverage would be in the millions, and doesn't necessarily breakdown individual unit payouts in the case of a total loss.
Since condo laws differ from state to state, it my be difficult for lenders to have a universal rule regarding insurance requirements. I suspect this request is kind of a catch-all requirement that probably is redundant most of the time.
Side Note: I had a few clients in the past request to be listed as additional insured on my company's insurance policy. I didn't care, nor did I want to risk losing business over it, and my insurance company was happy to oblige and provide the requested documentation for each client.