A Seller’s Past Insurance Claims Can Ding Buyers
A house’s claim history can increase premiums for future coverage – or even kill a deal if it has issues that cause insurers to consider it an unacceptable risk.
FORT LAUDERDALE, Fla. – You wouldn’t marry someone without asking them about their past. You shouldn’t buy a house without investigating its past, either.
Searching for liens, unrepaired damage, mold, termites and other potential problems is an important and required part of the “due diligence” that your prospective lender requires before approving a mortgage loan on your dream house.
But there’s more to look into. You should also investigate whether insurance claims have been filed by the home’s previous owners, said Mark Friedlander, director of corporate communications for the industry-funded Insurance Information Institute.
Buyers looking for homes in today’s hot South Florida real estate market face challenges securing coverage in Florida’s troubled insurance market. Repelled by high levels of fraud and abusive litigation, many insurers have stopped writing policies for properties built more than a decade ago, or with roofs over a certain age. To minimize risks of claims, insurers are trying to weed out properties in less than perfect condition.
A history of claims against a house can increase premium costs for future coverage. As a Coral Springs homebuyer recently found out, it can also be a deal killer if the house has other issues that would cause insurers to reject it as an unacceptable risk.
“Florida insurers continue to tighten their underwriting standards on home insurance coverage due to the ongoing property insurance crisis across the state,” Friedlander said in an email. “This includes assessing the risk of a specific property that may have incurred significant claim activity in the past and declining to provide coverage to a new owner of that property.”
Joe Heimovics learned this the hard way recently after signing a contract to purchase a 35-year-old home in Coral Springs this spring. A couple days after his agent told him he’d found a state-regulated company willing to write a policy, the agent called him again.
The company had searched the property through a claims reporting database and turned up an insurance claim filed just nine months earlier by the home’s previous owner, Heimovics said. The claim, combined with the age of the home, made it ineligible for coverage, his agents told him.
Heimovics declined to identify the company that decided not to insure his new house, saying he didn’t want to create any conflicts with the company.
The previous claim, for repair of water damage from a leaking washing machine, cost the insurer $16,000, Heimovics said. But whatever damage had been caused was evidently repaired, and the utility room that housed the appliance showed no sign of mold or water damage, he said.
Heimovics, an attorney specializing in corporate finance and real estate transactions, said several insurance agents he spoke to were unable to find another regulated company willing to cover the house. Its replacement value exceeded the $700,000 cutoff for eligibility with state-owned Citizens Property Insurance Corp., the insurance of last resort if private companies won’t insure a home.
More turning to surplus lines
So to satisfy his mortgage lender’s requirement that he secure full replacement coverage to be eligible for financing, Heimovics went outside the regulated insurance market and bought a policy from an unregulated company known as a surplus lines carrier. Because surplus lines companies aren’t required to seek state approval for their rates, the policy cost him about $7,000 more than he would have paid for insurance if the previous owner hadn’t filed a claim, he said.
More and more homeowners are turning to the surplus market, Friedlander said.
“We are seeing a significant uptick in surplus lines coverage for existing homeowners and new buyers when no private market coverage is available and where Citizens has rejected coverage due to various risk factors,” he said.
Insurers also look at homeowners’ credit ratings and their own claims-filing histories to gauge the likelihood for future claims.
Whenever someone signs a contract to buy an insurance policy, the insurer pulls what’s called a Comprehensive Loss Underwriting Exchange (CLUE) report. It works much like a credit report: Insurance claims filed by an applicant stay on the report for seven years, much like payment histories remain on your Experian, Equifax or TransUnion reports.
CLUE reports track claims histories for individual policyholders and for properties, Susan Manning wrote in June 2021 for the insurance marketplace website Insure.com.
“Most home insurance companies provide information to the CLUE report, so your claims history follows you,” Manning wrote. “Your home’s claims history also influences rates – even if the claims were before you owned the home.”
Heimovics’ experience is likely not common but could be a sign that insurers are looking for more ways to tighten their eligibility criteria.
Locke Burt, chairman and CEO of Ormond Beach-based Security First Insurance, said a single claim by a previous owner would not disqualify a new owner from getting covered by his company unless other factors were present. “We wouldn’t hold a prior claim filed by the old homeowner against the new owner of the house,” he said. “What you’d do is inspect the house to make sure the repairs were done properly.”
Owners of homes valued at less than $700,000 should be able to turn to Citizens Property Insurance Corp. if a prior owners’ insurance claim and the age of their home disqualifies them from private market coverage, said Citizens spokesman Michael Peltier. But that depends on all other conditions being OK, such as a newly built roof and no unrepaired damage.
But Peltier acknowledged, “Other carriers may not write the home due to the age and a prior claim.”
Get a CLUE
Tom Stravecky, a real estate agent with ERA Infinity Properties in Fort Lauderdale, said he has heard that a prior claim against a house could affect a buyer’s ability to secure a policy on the property. However, he said he hasn’t witnessed such a scenario kill any of his deals.
Stravecky recommends that buyers protect themselves by having their agent shop for insurance immediately after signing an initial purchase agreement. If a CLUE report turns up a disqualifying history of claims by the previous owner, it’s best to find out earlier in the sales process.
“It used to be that buyers would wait until the last minute to bind a policy,” he said. “I recommend doing it right away.”
No, buyers can’t access CLUE. Federal law restricts access to CLUE reports to a home’s owner, lender, and insurance provider. Insurers typically order reports when verifying applications of prospective policyholders, as in Heimovics’ case. Homebuyers can also ask the seller to purchase a CLUE report for about $20.
Most contracts require buyers to secure financing within 30 days or potentially lose their deposit. It’s spelled out in what’s called the Financing Contingency clause of purchase agreements.
With a shortage of homes on the market, buyers are making offers without thinking about availability or cost of insurance, Heimovics said. Home sellers and their real estate agents aren’t required to investigate past insurance claims or include anything about insurance claims histories in a sales contract. “But it would have been useful for me to know,” he said.
Homeowners who might be considering selling their house should think about how filing an insurance claim might affect their ability to close a sale, Heimovics said. If the damage can be repaired without filing a claim, that choice might prevent complications later, he added. “It goes both ways,” he said. “Everyone runs the risk of having something affect them if an insurance claim is filed.”
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