The New Reality of Property Insurance - Some Q & A
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:
1. past claims filed on the property (up to previous five years)
2. poor insurance credit score of the prospective purchaser
3. past claims filed by the property purchaser on other properties
4. physical characteristics of property (e.g., leaky roof)
5. characteristics of the property's location (e.g., proximity to fire station, regional weather conditions)4. cost of insurance doesn't exceed specified threshold
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.
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.
Excerts of a Report Prepared by the Risk Management Committee of the National Association of REALTORS®