7.20 Property Insurance Issues

Real estate transactions can be affected by the lack of availability and/or unaffordability of insurance to cover the property that is being bought or sold. In the past, securing property insurance was considered routine. It was not unusual to call the insurance agent a few days or a week before closing and have the insurance issued with little more than that phone call.

Today, the property insurance environment has dramatically changed and continues to do so. Buyers should address the property insurance issues seriously and early in the transaction process. Here are some important tips for buyers to consider about this new insurance environment:

1. Don't wait to secure insurance. As soon as the offer is accepted, have the buyer call their insurance agent and arrange for coverage. If the buyer is shopping around, the buyer should try to pick an insurance company/agent before writing an offer. Then, when the offer is accepted, they will know who to call. If the buyer has not picked an insurance company or agent by the time the offer is accepted, have them do it immediately after the offer is accepted.

2. Consider using an "insurability" contingency in the offer.

3. Consider buying an "Insurance Score" report. Similar to a "Credit Score," the buyer’s “Insurance Score" is used by many insurance companies in deciding whether to extend insurance coverage. The components of the insurance score may vary from company to company, but usually include a composite of the buyer’s credit score and their past record of filing insurance claims on other properties they have owned or rented. One company offering Insurance Score Reports is Choice Trust. Their web address is www.choicetrust.com (opens in a new tab). A Choice Trust Insurance Score Report costs about $15.

4. Consider obtaining a "Claims Loss History Report” for the property the buyer currently owns. Insurance companies have a database of insurance claims on properties throughout the United States. Insurance companies contribute claims information about properties they have insured and thus a record of claims as to each property that has been insured by a contributing company has been built over the past 10 to 15 years. Generally, claims over the past 5 years are available through theClaims Loss History Report. If a Claims Loss History Report reveals that a property has had "too many" past claims or certain types of claims (such as water damage), many insurance companies will not insure the property. Unfortunately, there is no standard among insurance companies about what are "too many" claims to result in a denial of coverage. Claims Loss History Reports can be requested from the current insurance company. The best time to get this report for the buyer’s own property is before they put it on the market and before they write an offer to buy a new property. If the buyer’s current property reveals significant insurability issues, this may affect their buying decision.

5. Consider asking the seller of the property that the buyer is interested in to provide a Claims Loss History Report for their property when writing an offer to purchase.

6. When buying insurance, ask the insurance agent if the binder or policy can be canceled by the insurance company after it has been issued. Some binders and policies give the insurance company up to 60 days to cancel the policy for any reason, including information revealed in aClaims Loss History Report . This 60 day period may extend after the closing date. Cancellation of insurance after closing could cause serious problems with the lender.

7. Even if property insurance is available, it may be significantly more expensive than in the past. Property insurance premiums have risen substantially overall in recent years. Also, a property that has an unfavorable Claims Loss History Report may be insurable, but only at a significantly higher premium. Buyers with low insurance scores may also be required to pay higher premiums to secure property insurance.