The New Reality of Property Insurance
What You Should Know
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.
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. 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?
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
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:
a. past claims filed on the property (up to previous five years)
b. poor insurance credit score of the prospective purchaser
c. past claims filed by the property purchaser on other properties
d. physical characteristics of property (e.g., leaky roof)
e. characteristics of the property’s location (e.g., proximity to fire station, regional weather conditions
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?
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.
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 requirement 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
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:
a. acceptable C.L.U.E. report
b. Purchaser is satisfied of the insurability of the property
c. secure binder of property insurance on property
d. 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
available sources of insurance (i.e., what other insurance
companies are in market by calling different insurance agencies in the
· 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®