Dealing with difficult to insure properties

This article appeared in Realtor Edge recently...

The ability to obtain property insurance is a critical component of any real estate transaction. Without home insurance, a buyer cannot obtain a mortgage, and without a mortgage, the transaction falls apart.

But insurance companies have tightened the rules for obtaining insurance and have become less willing to insure some types of property. Issues such as old wiring or furnaces more than 20 years old, among other things, raise red flags of concern for insurers.

REALTORS® should be aware of the growing number of home insurance problems faced by would-be home buyers and how insurance requirements can affect a real estate deal. It’s important to know how to protect your buyer through the proper use of clauses and forms and how to advise sellers on ways to make their property insurable.

REALTORS® should raise the subject of insurance early on in the relationship with their buyers at the same time that they are informing them of the other expenses that they will normally encounter.

What insurers look for
When looking at a home, insurance companies consider the age and condition of the house, including the electrical system, plumbing, heating, wood burning appliances, oil tanks and structural components. They will also want to know if the home is to be owner occupied, rented or left vacant. Insurance companies also look at the individual applying for insurance. Individuals with a number of previous claims, a history of payment problems, policies that have been cancelled, declined or lapsed, a poor credit rating or convictions for insurance fraud are likely to see their applications declined or a surcharge added to their premium.

If you are working with a buyer and you feel that a particular issue on the property may cause concerns for an insurance company, it’s best to bring it to the buyer’s attention and recommend an insurance condition in the agreement of purchase and sale. Clause 8 of OREA’s Agreement of Purchase and Sale sets out the time limits for the buyer’s solicitor to perform searches relating to the property including determining whether the building may be insured against risk of fire. The buyer is allowed until the earlier of thirty days past the requisition date as noted on the offer or five days prior to completion. In effect, this makes the offer conditional upon the buyer obtaining fire insurance on the property.

However, rather than rely on the pre-printed wording of clause 8, a prudent salesperson, when dealing with a property that may be difficult to insure, should address that issue with a condition specifically developed for use in those circumstances including OREA’s INS-1 Condition- Obtaining Insurance, and INS-2 Condition – Obtaining Insurance – Cost Not to Exceed.

It’s also always a good idea to recommend a home inspection which could uncover potential insurance issues whether you are working with a buyer or a seller. Sellers, armed with a pre-listing inspection report outlining potential problems with their home, could take care of any necessary repairs in order to make their property insurable before it goes on the market. In addition, a home inspection report, provided by either the seller or the buyer, and given to an insurance company, may make it easier to obtain insurance.

Keep in mind, insurance should be arranged as soon as the offer to purchase is accepted to allow enough time for the insurance company to review an application for insurance. It’s not a good idea to wait until closer to the closing date because if the company refused to write the insurance, the buyer would not have time to arrange insurance elsewhere and the closing of the transaction could be in jeopardy.

The best place for your buyer clients to start when obtaining insurance is to ask the insurance representative who insures their current home, apartment or automobile.

That representative already has insurance information about the buyer and many companies offer a discount if they insure both auto and property. Buyers should work with their insurance broker to find an insurer that covers the type of property they are considering purchasing. For example, some insurance companies will underwrite only homes in certain geographic areas; others may not insure homes with underground oil tanks or homes that are over 50 years old.

In cases where your buyer cannot obtain insurance in the regular market, there are substandard and specialty markets available. However, they do not deal directly with the public. An insurance representative may be able to arrange insurance for the buyer, but premiums are usually higher and coverage may be less.

Although REALTORS® are not expected to be insurance experts, they should be aware of insurance concerns and know how to protect clients by recommending conditions in an offer or advising sellers on how to rectify problems prior to listing the property. REALTORS® can learn more about insurance concerns in OREA’s continuing education course called Insurance Concerns for Buyers.