What you don't know about insurance can hurt your clients

As if the real estate market wasn’t challenging enough between interest rates and low inventory, another “I” is added to the list: Insurance. Suddenly something that most agents, buyers and lenders barely worried about is now front and center of a real estate transaction. 

A tropical storm and earthquake hitting Southern California in one day? Devastating fires in Hawaii? Unfortunately, what were deemed “once in a lifetime” weather events are becoming more commonplace. 

It used to be that a week or so before closing the lender and agent reminded their buyer to secure their insurance and it was a scramble to call a few insurance companies, get quotes and pick one. Now? If you wait until the end, it’s too late, it can derail the deal and potentially cost the buyer their escrow deposit.

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If you are in Florida or California, you know what I am talking about (hopefully), and if you aren’t in a state affected by insurance yet, take heed, because this crisis could be coming to a location near you. 

With the cost of reinsurance skyrocketing, coupled with a plethora of severe weather events from hurricanes, tropical storms, torrential rains, flooding, high winds, hailstorms, mudslides and fires, numerous insurance companies have gone bust, opted not to renew existing homeowners, and stopped coverage in certain states or areas.

That means many people have been forced to a state’s insurer of last resort. Depending on your state and how insurance is regulated (or not) there could be a menagerie of confusion. 

As such, the rules are there are no rules. Insurance chaos reigns supreme. Helping buyers and sellers navigate the current insurance climate is a must to ensure they (and you) can get to the finish line. 

Here are six things to watch for. 

1. Troubleshoot on the front end

When taking a listing, troubleshoot potential issues on the front end. Once the seller has an accepted offer and you are three weeks into the transaction is not the time to find out the property will have difficulty getting insurance.

While these are obvious questions, and yes, the seller will have to complete a seller’s disclosure of some sort that will address questions that could affect insurability, ask them how old their roof, heating and air conditioning systems are, water heater(s), plumbing and electrical, especially on an older home.

Has the electrical panel and/or wiring been replaced? If they don’t know, consider bringing in a trusted home inspector who can determine this information.

In Florida, for example, many home inspectors are certified to conduct what is known as a “Four Point Inspection” that will identify the age and condition of these components. They often know the requirements of the various insurance companies and what they will want. 

For example, having copper piping in Florida is viewed as a huge risk due to slab leaks that can occur when a pipe springs a pinhole leak. Electrical panels and wiring are another gotcha as insurance companies don’t want to touch a home with a Federal Pacific panel or older wiring such as aluminum strand or cloth wiring often found in older homes. 

What was acceptable five years ago or wasn’t a big deal when the seller bought the house cannot be assumed to be OK now. A home I recently sold in Southern California had alumnium wiring. This became more of a concern now vs. a few years ago. 

And if the roof is older — that may be the kiss of death. In Florida, insurance companies don’t want to write a new policy on a home with a roof that is 12 years old or more. A few years ago, it used to be you could get insurance on a roof approaching 18 years old, but now, forget it. 

With the information about the age and condition of critical components of the home you can work with the seller to determine a plan as far as potential replacement and insurance coverage. 

2. Have several reputable insurance agents on speed dial

If you haven’t established a connection with several insurance agents in your market, now is the time to do so. Take some time to learn about the current state of insurance in your market, what products they offer, the nuances involved in obtaining insurance and what will be required.

Ask them if they have any companies that can write insurance on homes with older components and the process involved. They will be happy to build a referral relationship and serve as a trusted resource for you. 

When you are taking a new listing or starting to work with a buyer, lean on them to pre-flight potential insurance issues based on the property you are going to be selling or the kinds of properties that the buyer is going to be looking at. The buyers may need some education on the insurance challenges and costs associated with the homes they are interested in, particularly if they are older. 

3. The property’s insurability will determine the financing

This part is critical. I recently had a listing in pre-foreclosure status where no components had been replaced on the home, which had been built in 2006. All was original as far as the roof, HVAC and water heater.

There were huge red flags everywhere with this property, between the age of all of the systems plus the overall condition of the home that had a ton of deferred maintenance, both inside and out. To make matters worse, there were two buckets placed in the attic to catch any water leaks when it rained. 

There was no way any buyer obtaining a conventional, FHA or VA loan was going to get insurance unless the buyer was doing a renovation loan or paying cash. In these cases, they could secure a builder’s risk policy that would allow them to make the required replacements within a specific timeframe and then convert to a regular insurance policy. 

The only way to market the home was to make it clear how the home could be purchased and touting the benefits of a renovation loan for those who needed or wanted to obtain financing. I teamed up with a trusted lender who specialized in this loan product, and we tag-teamed on marketing the property and engaging with agents who had potential buyers to educate them about the renovation loan process. I was also receiving inquiries from cash buyers.

In the end, two offers were presented to the seller, one of which was cash and much lower than one that was approved for FHA financing; the seller opted to work with the latter. 

Now, every property is not in such dire shape, but there may be one or two things on the home that will make it harder to get insurance or could completely kill the deal. Electrical panels are easy to replace, but having to replace wiring can be costly and more time-consuming. 

Realistically, a seller with a twelve-year-old roof on their home is not planning on replacing it in the near future and certainly does not want to have to do so in order to be able to sell. In this situation in Florida, for example, Citizens Insurance which is known as “the insurer of last resort,” will insure homes with roofs past their twelve-year prime, with conditions and exceptions of course, and the cost will be more. 

If you know about the home’s components ahead of time, you can determine what financing options will best match the property. 

4. Claims-check the property

You know that section on a seller’s disclosure where the question is asked if the seller ever filed any insurance claims? Make sure you ask your seller if they have ever filed any claims or if they recall any were filed by the prior owners when they bought the home and attempted to get insurance. 

It is not enough to just rely on reading the seller’s disclosure they completed and for the seller to answer with a few general sentences on this document. Make sure you understand all the details of what happened and have the seller provide a clear and detailed accounting of this in writing.

The buyer and their agent are going to want to know and, besides the importance of disclosure, when the buyer goes to obtain insurance, guess what? The record of that claim (as well as any that have been filed within the last seven years) is going to turn up on the Comprehensive Loss Underwriting Exchange (otherwise known as a CLUE Report) that participating insurers check when working on a quote for a new policy.

Think of this as a “rap sheet” or background check on a property when it comes to insurance. If the seller filed a claim, (whether or not the claim was approved and paid out or denied), there will likely be evidence about it on this report. 

The fire drill then ensues when the buyer’s agent frantically calls the listing agent to advise what was found and they explain the insurance agent is asking for more information about the claim. Does the seller have any receipts, invoices and documentation showing it was repaired, etc.? This can be a crapshoot as the seller may have totally forgotten about it and accidentally omitted it from their disclosure and/or can’t find any documents to provide to the buyer and their insurance agent.

Murphy’s Law is alive and well and you can bet they will have lost, deleted or thrown out any receipts, invoices, scope of work, photos, etc., because it was several years ago. Plus, they often can’t remember who did the work, and given the pandemic, who knows if the contractor, let alone the insurance company, is still in business.

This fire drill happened to me earlier this year on a newer townhome listing I had. The seller was not the original owner and barely lived in the property for about a year. He then rented it for two years and his daughter lived there for about a year thereafter.

The seller was a longtime client of mine who had multiple investment properties I had sold for him over the years. He was great to work with in that he let me take the ball and run with it, never micromanaged, listened and followed my advice. However, he’s here, there and everywhere and constantly traveling for business. Details and paperwork? Well, not so much. 

It turns out when the buyer of this townhome went to obtain insurance, it was revealed that a notice of a claim was filed regarding a leak from several years ago. Information forthcoming from the selling agent was vague. The seller barely remembered it and if it was before COVID, which this was, it seems memories are even scarcer.

Thankfully, I was able to track down his previous tenants who were able to fill in the blanks and it was a leak from the upstairs air handler that caused damage to the kitchen ceiling below. A remediation company was brought in to do the repairs.

Apparently, they were done well because I never noticed any signs of a repair after the tenants moved out, and neither did my handyman who had done a lot of prep-for-sale work before we put it on the market including painting the entire interior. Neither did the buyer’s home inspector who never noted any kind of repair on the kitchen ceiling. Not one agent who had shown the property ever asked about the ceiling or what looked like a past repair. 

The seller changed jobs right after the pandemic and said he had no documentation on file about it. He had gotten a new computer with his new company and literally started over. He didn’t use a personal laptop for his own affairs. He vaguely remembered the name of the company who did the repair work.

The property manager at the time was able to add a little bit more information but did not have any documents relating to the claim. The mystery continued and I was on a mission to get to the bottom of this. With some sleuthing, I was able to track down the company who did the work, but I found out they had spun off their restoration division to another company.

I called that company and amazingly, they were able to dig up some records including before and after photos of the repairs that they sent to the seller. This took an entire day and a half plus with all the back and forth between the former tenants, property manager, seller and restoration company. It was a fire drill supreme. 

Thankfully, because I was able to track this information down, we were able to satisfy the buyer’s insurance company that all had been taken care of. Underwriters are in a vault and disconnected from the reality of these situations, so even if you took photos and sent those to them, that would not be sufficient.

There was talk of them sending out an independent insurance inspector to verify that there was no leak, but that never happened. Ultimately, the buyer was able to get insurance, but the rate was higher as a result of the claim and the buyer was not happy about that. Thankfully, the buyer was putting a substantial amount down on the home so the higher insurance cost did not affect their payment. 

The moral of the story? Sellers need to think long and hard when answering questions about insurance claims on a seller’s disclosure to make sure nothing is missed and come clean about all claims that were filed, whether they were approved or not, so that agents know what they could be up against. If a seller can’t remember, it may make sense to have a trusted insurance agent run a CLUE report so you can run interference on all potential issues.

Better to have a fire drill and a plan of action before the property goes on the market vs. when you have gone under contract with impending deadlines, at which time the property is off the market as far as showing activity goes, and moving trucks and a closing date have been scheduled. 

I also had another situation very recently wherein the prior seller had filed a claim for a major stucco repair that had been denied. The new owners never filed a claim but spent over $10,000 having the repair done once they closed on the home. When the new buyers checked on insurance, the evidence of the denied claim came up, which was a potential roadblock.

Thankfully, the company the sellers used to do the repair was still in business and we could provide a copy of the permit and final sign-off by the county showing the work that the seller had paid to have it properly completed. 

It is important to know that CLUE reports aren’t just for the property that the seller plans to list. They are also for buyers. If a buyer has had any kind of “rap sheet” with regard to filing insurance claims over the years, that can make things more difficult and costly for them to obtain insurance. Couple that with the property they are buying’s claim history and you could have a recipe for disaster.

Buyer’s agents need to have an insurance discussion with their clients as part of their initial “counseling” session about their property search, so they aren’t surprised later. Buyers don’t realize how having a claims history on properties they have owned, rented or even cars they have owned can affect their ability to secure insurance. 

With buyers’ budgets being pushed to the limit between prices and interest rates, the cost of an insurance policy could negatively impact the buyer’s ability to qualify for a loan and exceed the qualifying ratios required. 

5. Be prepared for higher insurance quotes 

What the seller is currently paying for insurance will be dramatically different (unless the seller bought the home a short time ago and is selling) than what will be quoted to a new buyer. One way to try to save money is to see if the buyer can assume the seller’s existing policy or go through the same company to obtain insurance.

In reality, this is easier said than done as the seller’s insurance company may have merged, changed or gone out of business and been picked up by another company, or they were dropped and had to find different insurance. However, it may be worth a shot to ask. In some markets like Florida, this will be increasingly difficult to do with so many companies no longer writing policies as well as those that have gone out of business. 

6. What insurance will the buyer need?

A few years ago, not much thought was given to whether the property was deemed to be in a flood zone requiring flood insurance. FEMA’s Flood Zone X (that did not require flood insurance) was typically considered a safe zone from having to deal with the risks of flooding.

Flash forward to 2023: Think again. Many properties that were never in a flood zone are now deemed to be and flood insurance is required. FEMA offers this helpful resource for checking flood zones. Your state or county may also have online look-up tools available. 

It is important to explain to the buyer that FEMA does update the flood maps every few years and what was not in a flood zone when the seller bought the home or even currently, could be considered in the future, as things can change. Also, a property does not need to be near the water to be at risk for being in a flood zone. 

In addition, having a standard homeowners insurance policy does not protect a buyer from damage caused by flooding, so when in doubt it is always good practice to obtain flood insurance regardless of whether the property is in a flood zone or not. 

The same can also be said about earthquake insurance. Do not assume a homeowner’s insurance policy or a condominium policy covers this. If the property is located in an area prone to earth movement, buyers need to ask about differences in coverage policies as well. 

Bottom line, buyers and agents should never assume anything, let alone when it comes to insurance. The very thing that you think might never happen very well could. It is important to know if there is a kind of insurance to address some or all of the potential conditions. The buyer needs to be pointed in the right direction to learn about their options and make an educated decision. 

Insurance is a hot-button issue that is likely not going away anytime soon. Unfortunately, as long as Mother Nature is in control, agents, buyers and sellers need to be more proactive than ever when it comes to staying up to date on the insurance situation in their market and being prepared to ensure a smooth transaction — as well as protecting the single largest investment their clients will likely ever make.