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Information, advice and opinions that even an honest real estate agent might not tell you about the real estate industry.
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Insurance Services |
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What You Should Know
Q. How can insurance availability/affordability
affect the real estate transaction?
A. The affordability and availability of insurance
affects both buyers and sellers. Buyers will
typically be obtaining mortgage financing to pay the
purchase price of the property. The lender will
require that there be property insurance to cover
their interest in the property. If proof of insurance is
not available at closing the lender will likely refuse
to release the funds and therefore delay or even
derail the transaction, either of which can impose
both inconvenience and cost to both the buyer and
seller. Even in a “cash” transaction the buyer may
be hesitant to complete a transaction where
insurance is not available to cover the buyer’s equity
in the property.
Q. When should a buyer apply to obtain an
insurance policy to cover the property being
purchased?
A. The interest of both buyers and the sellers now
suggests that the buyers should begin their search for
insurance no later than the time of the contract to
purchase is signed. This helps to assure a firm
commitment for the issuance of a policy well in
advance of the settlement of the transaction.
Waiting until the last days or even weeks before the
closing can limit the opportunities of the buyers and
sellers to address the affordability and availability
issue and, if needed, to find alternatives for difficult
to insure properties. There have been many
examples of transactions which have been adversely
affected in some manner because of problems
associated with insurance availability/affordability.
Q. What kinds of events/records can affect the
ability to obtain insurance on a property being
purchased?
A. A number of factors can affect the availability
and cost of homeowner insurance on a property
being purchased. For example, they include:
past claims filed on the property (up to previous
five years)
- poor insurance credit score of the prospective
purchaser
- past claims filed by the property purchaser on
other properties
- physical characteristics of property (e.g., leaky
roof)
- characteristics of the property’s location (e.g.,
proximity to fire station, regional weather
conditions)
Q. How does the insurance company know what
claims have been filed in connection with the
property?
A. Approximately 90% of all insurance
companies contribute information regarding claims to an insurance industry database. When
underwriting a new policy the insurance company
may obtain a report from this system from one of a
couple different sources to determine the property’s
claims history. This report is most often identified as
a comprehensive loss underwriting experience report
or a “C.L.U.E. Report.” The report contains
information regarding property claims filed in
connection with a particular property and claims filed
by a particular insured person. For a fee the current
owner of the property may obtain a copy of this
report. A copy of the report is available to the
property owner through companies such as
ChoicePoint, Inc, either by writing to ChoicePoint,
Inc. located in Alpharetta, Georgia, or by going to
their website, choicetrust.com, and A-Plus, either by
writing to A-Plus located in Jersey City, New Jersey
or calling 800/709-8842.
Q. Should I get a copy of the C.L.U.E. Report?
A. While this decision is up to the property owner, it
is important to understand the limitations of the
report. The report contains only raw information and
how that information will affect the insurability of a
property isn’t explained as a part of the report.
Moreover, not all insurance companies use the report
and those that do use it don’t all use the information
in the same way. As a result having the report may
not enable you to predict whether a particular
company will insure the property. If you want
information on how a C.L.U.E. Report or other
similar report may affect your ability to obtain
insurance contact your insurance agent.
Q. Are there factors unique to a buyer that can affect
their ability to obtain insurance?
A. Yes, although not used by all insurance
companies in determining eligibility for insurance,
some companies do review the claims filed by the buyer on properties owned by the buyer during the
preceding five years. This is another aspect of the
C.L.U.E. Report database that focuses upon the
insured individual rather than the insured property.
Another more controversial factor is the use of
Insurance Scores.
Insurance Scores, which are
formulas developed by insurance companies in an
effort to predict the likelihood of an individual filing
claims, are sometimes used to determine to whom or
at what price an insurance policy will be issued.
Insurance scores are not standardized within the
insurance industry and both how they are calculated
and how they are used is generally not known outside
of individual insurance companies. If you want
additional information on how insurance scoring may
affect your ability to obtain insurance contact your
insurance agent.
Q. Can a seller include a requirement that the buyers
demonstrate their insurability as a condition of the
sales contract?
A. Yes, although not common, such a require ment
could be included in an agreement. However, the
specific language of such a condition should be
carefully considered. Check with your real estate
agent to find out if any standardized language has
been developed in your community and/or consult
with your attorney. As discussed herein the factors
used to determine a particular buyer’s insurability
will vary from one insurance company to another and
can leave questions regarding whether and when such
a condition had been satisfied.
Q. Can a buyer include a requirement that property
be insurable and/or the insurance be affordable as a
condition of the sales contract?
A. Yes, but the specifics of such a condition should
be carefully considered. Check with your real estate agent to find out if any standardized language
has been developed in your community and/or
consult with your attorney. There are multiple
factors which might be used to determine a
property’s insurability or the “affordability” of
the insurance in such a clause. The factors used
in a contract clause could include, but are
certainly not limited to:
- acceptable C.L.U.E. report
- purchaser is satisfied of the insurability of
property
- secure binder of property insurance on property
- cost of insurance doesn’t exceed specified
threshold
Both buyers and sellers should be aware that there
are advantages and disadvantages to such a clause
that should be considered. The advantage of such a
contingency is that it may allow the buyer to cancel
the transaction if the property proves uninsurable or
insurance is unaffordable. This avoids reliance on a
financing contingency and any question regarding its
application where the property and borrower would
otherwise qualify for a loan. On the other hand, the
inclusion of such a clause may affect the
acceptability of an offer, particularly if the offer is
being made in a competitive environment.
Transaction Checklist – Insurance Issues
- Discuss current insurance market conditions
with your insurance agent and any problems
you may have in obtaining insurance on the
home you are purchasing
- Review offer to purchase to identify insurance
issues/contingencies or need for such
contingencies with your attorney
- Contact one or more insurance agents
immediately following acceptance of purchase
contract by both parties to begin process of
obtaining necessary insurance.
- Obtain commitments to issue an insurance
policy from an insurance company in writing
and carefully review it with your attorney or
insurance agent to determine scope of that
commitment.
- Be aware of alternative insurance sources that
may be available if a problem develops:
- Know available sources of insurance (i.e.,
what other insurance companies are in market
by calling different insurance agencies in the
community)
- Check with Seller’s current insurer to
determine if that insurer will continue to
insure property with new owner
- Check with Buyer’s current insurer to
determine if that insurer will continue to
insure buyer in a new property
- Alternative forms of coverage that may allow
transaction to proceed (FAIR Plans, Fire &
E.C., etc.)
Prepared by the Risk Management Committee of the
National Association of REALTORS®
© 2003 National Association of REALTORS®
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