An agent’s insured is a residential condominium association. The bank of one of the association’s unit owners requests the insured to add it to the master policy as loss payee/mortgagee. In the past, the agent provided evidence of insurance to the bank’s attorney without adding the bank as requested, but now, the bank refuses to accept that response.

Q: "How do I respond when the carrier is not willing to offer this because there is no insurable interest with the unit owner and their policy?"

A: “They're wasting their time and your time with pointless requests like this. No underwriter in their right mind will do this. Many associations have hundreds of unit owners. Imagine the workload involved with adding all their lenders to the master policy—not to mention revising it every time the mortgage is sold to another lender.

I know an agency that writes almost exclusively homeowners associations with thousands of units. It would be a nightmare to manage thousands of mortgagees, additional insureds and loss payees on their master policies.”

Another agent’s client is an office condo association. A new customer is purchasing a unit, and similarly, their bank requests to be added to the association’s policy as mortgagee and lender loss payee. The agent informs the bank they cannot fulfill the request.

Q: "Are we correct? They are threatening to refuse settlement over this and advising the unit owner that we are the cause of them not going to settlement."

A: “Here is a Virtual University article about residential condos: ‘Condos and Additional Insureds.’ The same logic should apply to your situation.

The mortgagee on the condo unit is not a mortgagee on the jointly owned real property, so stating that they are a mortgagee on the master policy would not be appropriate. Doing so might even be interpreted as insurance fraud, or at least a misrepresentation or false statement under an unfair trade practice or similar law.

I don’t know what the loan documents say, but presumably, the loan is on the economic interest of whatever real property—or even ‘box of air’—is covered by the mortgage on the purchased unit—again, not on the jointly owned real property covered by the master policy. The unit mortgagee should not be entitled to recovery under a lender loss payable clause on the master policy because they are presumably not a lender on the property insured by the master policy.”

Bill Wilson is director of the Big “I” Virtual University.

This question was originally submitted by an agent through the VU’s Ask an Expert Service. Answers to other coverage questions are available on the VU website. If you need help accessing the website, email logon@iiaba.net to request login information.