Certain lenders do require this, such as SunTrust, while others do not need the 20% of appraisal value specification, such as Wells Fargo.  It is up to the lender and the only thing you can do to avoid is change lenders. 

I am finding lenders are becoming stricter on individual unit condo policies due to the recent changes by Fannie, Freddie, and the Treasury Dept.  Also, not all insurance companies will insure up to 20 percent of the value  because they feel they are insuring over and above the required amount.  These changes are due to major financial problems facing many Homeowners Associations and their failure to keep the insurance up to correct levels.  I also have a feeling that what happened with disasters like Katrina has scared these agencies into making sure all condo homeowners are properly insured.

This is a requirement for all Fannie Mae  ("conforming") loans nowadays, unless the master policy of the condominium includes "all-in" or "wall-in" coverage for the interior of the unit. Ask your lender (or call the insurance agent yourself) if there is wall-in coverage in your condominium master policy - a lot of associations have added this coverage in response to the fannie mae dictate. IF the coverage is already in place, the insurance company can give you a letter that indicates the coverage, or add the verbiage to the binder that they send the lender. If not, this coverage will be required in order to obtain a conforming mortgage.

In an update released last year by fannie mae (update 08-34), fannie now requires:

" The Selling Guide, Part XII, Chapter 5, Insurance Requirements require that lenders verify that hazard insurance for all condominium projects with attached units, including two- to four- unit projects, covers fixtures, equipment, and other personal property inside individual units if they will be financed by the mortgage. The updated policy now requires that the borrower obtain a “walls-in” coverage policy (commonly known as HO-6 policy) unless the lender can document that the master policy provides the same interior unit coverage. The master policy must include replacement of improvements and betterment coverage to cover any improvements that the borrower may have made to the unit. The HO-6 insurance policy must provide coverage in an amount that is no less than 20 percent of the condominium unit’s appraised value. In the event such coverage can not be obtained, the lender should call the Fannie Mae Project Standards Department at the phone number listed at the end of this Announcement. The standard requirement for a 5 percent deductible applies." (All Fannie Mae updates can be found on www.efanniemae.com as they are released).