Senate Bill Report — 2SHB 1516

Summary

A Washington State Senate Bill Report on 2SHB 1516, as of March 17, 2025, prepared by non-partisan staff of the Senate Committee on Business, Financial Services & Trade. The bill would require the Office of the Insurance Commissioner (OIC) to study insurance coverage options for permanently affordable homeownership developers to reduce condominium construction defect liability costs. The report notes the bill passed the House on 3/11/25, 58-38, with committee activity on 3/19/25. It summarizes background on the Washington Condominium Act's implied warranties and qualified warranties, requires insurers and risk retention groups to supply data, and sets a report to the Legislature by December 31, 2026. It also sets out definitions and states the study section expires December 31, 2027.

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                            SENATE BILL REPORT
                                 2SHB 1516

                                      As of March 17, 2025

Title: An act relating to conducting a study of insurance coverage options for permanently
     affordable homeownership units.

Brief Description: Conducting a study of insurance coverage options for permanently
     affordable homeownership units.

Sponsors: House Committee on Appropriations (originally sponsored by Representatives Hill,
    Taylor, Reed, Simmons, Morgan, Ormsby, Farivar, Parshley, Gregerson, Macri, Ramel,
    Pollet and Salahuddin).

Brief History: Passed House: 3/11/25, 58-38.
     Committee Activity: Business, Financial Services & Trade: 3/19/25.


                                     Brief Summary of Bill
           • Requires the Office of the Insurance Commissioner (OIC) to conduct a
             study on options for permanently affordable homeownership developers
             to reduce condominium construction defect liability costs.
           • Authorizes the OIC to contract with actuarial or other consultants for the
             study.
           • Requires insurers and risk retention groups to provide requested
             information to the OIC for the study.
           • Requires the OIC to provide a report to the Legislature by December 31,
             2026.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES & TRADE

     Staff: John Kim (786-7453)




     This analysis was prepared by non-partisan legislative staff for the use of legislative
     members in their deliberations. This analysis is not part of the legislation nor does it
     constitute a statement of legislative intent.

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     Background: Permanently Affordable Homeownership. Permanently affordable
     homeownership units are sold to households under certain income limits that are sponsored
     by a nonprofit organization or governmental entity and that are subject to certain
     refinancing restrictions and resale restrictions designed to provide affordability to future
     low- and moderate-income homebuyers. In 2021, the Legislature created a property tax
     exemption for new housing construction, conversion, and rehabilitation improvements
     assuring permanently affordable homeownership.

     Condominium Implied Warranties. Under the Washington Condominium Act,
     condominium sales are subject to implied warranties of quality construction. According to a
     2022 study on condominium conversions (Commerce study) by the Washington State
     Department of Commerce, condominiums are subject to a higher warranty standard than
     detached housing or apartment buildings.

     Such implied warranties include:
        • that the unit will be in at least as good condition at the earlier of the time of the
           conveyance or delivery of possession as it was at the time of contracting, except for
           reasonable wear and tear and damage by casualty or condemnation;
        • that the unit and the common elements in the condominium are suitable for the
           ordinary uses of real estate of its type;
        • that any improvements made or contracted for by a declarant developer or dealer will
           be free from defective materials; constructed in accordance with engineering and
           construction standards, including applicable building codes generally accepted in the
           state of Washington at the time of construction; and constructed in a workmanlike
           manner; and
        • that an existing use, continuation of which is contemplated by the parties, does not
           violate applicable law at the earlier of the time of conveyance or delivery of
           possession.

     Condominium Defect Liability Insurance. State law authorizes condominium developers to
     obtain defect liability insurance for the unit owners and owners' association by providing a
     qualified warranty, which is deemed insurance for purposes of the Washington Insurance
     Code. Providing the qualified warranty releases the declarant developer from implied
     warranty liability.

     A qualified warranty is subject to minimum coverage standards, including that it provide a
     two-year materials and labor warranty for noncompliance with building code; a five-year
     building envelope warranty providing coverage for defects in the building envelope; and a
     ten-year structural defects warranty that provides coverage for defects that cause structural
     damage that renders the condominium unlivable.

     According to the Commerce study, insurance providers have been unwilling to provide such
     insurance and the provision has largely gone unused. The study found that following a 2019
     state law constraining condominium defect liability, many developers still did not reenter


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     the condominium market.

     Summary of Bill: Study by the Office of the Insurance Commissioner. The Office of the
     Insurance Commissioner (OIC) must conduct a study regarding how projects that develop
     new permanently affordable homeownership units may utilize different insurance coverage
     options and approaches to reduce costs related to condominium construction defect liability
     while maintaining commensurate access to insurance coverage.

     The study must be conducted in consultation with:
        • identified nonprofit organizations and government entities that sponsor permanently
           affordable homeownership units;
        • authorized insurers of permanently affordable homeownership projects;
        • unauthorized insurers of permanently affordable homeownership projects;
        • representatives of the residential building construction industry; and
        • relevant state associations.

     In conducting the study, the OIC must:
         • collect and use relevant findings from past insurance market studies conducted by the
           OIC on or after December 31, 2017, or other relevant information released on or after
           December 31, 2017, that may assist the OIC in conducting the analysis or making
           recommendations; and
         • collect information and data from entities transacting insurance in the state.

     The OIC may contract with actuarial or other consultants to facilitate the study. Funding for
     the study must be provided from the OIC's regulatory account.

     Requirement for Insurers and Risk Retention Groups to Provide the Office of the Insurance
     Commisioner with Requested Information. Any identified authorized insurers, unauthorized
     insurers, and risk retention groups are required to provide the requested information and
     data to the OIC in conducting the study.

     Legislative Report. The OIC must submit a report on its findings to the appropriate
     committees of the Legislature by December 31, 2026. The report must include:
        • an actuarial analysis of how the condominium construction defect liability risk pools
           for nonprofit organizations and government entities that sponsor permanently
           affordable homeownership units may differ from for-profit models of condominium
           production, sale, and ownership;
        • an analysis of the role that the OIC and insurers can play to lower condominium
           construction defect liability insurance costs for nonprofit organizations and
           government entities that sponsor permanently affordable homeownership units; and
        • recommendations for how current or new insurance mechanisms may be used to
           reduce insurance costs for nonprofit organizations and government entities that
           sponsor permanently affordable homeownership units.



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     Definitions. The term permanently affordable homeownership is defined to mean a unit that,
     in addition to meeting the definition of affordable housing, is:
         • sponsored by a nonprofit organization or governmental entity;
         • subject to a ground lease or deed restriction, the forms of which may include a ground
           lease, deed restriction, community land trust lease, or affordability covenant that
           includes:
               1. a resale restriction designed to provide affordability for future low and
                  moderate-income homebuyers;
               2. a right of first refusal for the sponsoring organization to purchase the home at
                  resale, except in cases where the sponsor organization is a limited equity
                  cooperative and the sponsor organization is not partnered with a community
                  land trust; and
               3. a requirement that the sponsor must approve any refinancing secured by the
                  home, including home equity lines of credit, except where the sponsor
                  organization is a limited equity cooperative and the sponsor organization is not
                  partnered with a community land trust; and
         • sponsored by a nonprofit organization or governmental entity and the sponsor:
               1. at the initial sale and at each successive sale of the unit, executes a new ground
                  lease or deed restriction, the forms of which may include a ground lease, deed
                  restriction, community land trust lease, or affordability covenant with a
                  duration of at least 99 years; and
               2. supports the unit's homeowner and enforces the ground lease or deed
                  restriction.

     The term affordable housing means residential housing for rental occupancy which, as long
     as the same is occupied by low-income households, requires payment of monthly housing
     costs, including utilities other than telephone, of no more than 30 percent of the household's
     income.

     Expiration. The OIC study section created by the bill expires December 31, 2027.

     Appropriation: The bill contains a null and void clause requiring specific funding be
     provided in an omnibus appropriation act.

     Fiscal Note: Available.

     Creates Committee/Commission/Task Force that includes Legislative members: No.

     Effective Date: Ninety days after adjournment of session in which bill is passed.




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