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Could You Be Thwarted By Your Insurance Company The Next Time You Wanna Buy A House? -plus- Did You Know That You'd Better Start Doing Background Checks On Property Before You Agree To Purchase? -plus- Where To Go To Find Out The History Of Any Property
June 27, 2002
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Dear Ben: Was it my imagination or did I hear you correctly on one of your recent shows: Did you say that it may become impossible for me to buy a home if I can't find insurance for it? If I've got good credit and plenty of money for a down payment, how can my insurance company block my desire to be a homeowner?
- L.C., via e-mail
Dear LC: Amazing...and true. Texas has been in the national news as a result of some major mold-related lawsuits (and subsequent victories) pitting homeowners against their insurance companies. Mold has been around for a long time, but thanks to continued improvement in the science of home design, as well as improvements in the types of materials and methods used for insulation, today's homes are more "airtight" than ever before. And when water damage or leaks develop, the liquid stays trapped inside, fueling mold growth that demands aggressive clean-up and repair.
Ripping out walls, ceilings and floors can cost thousands of dollars [the average claim costing almost $18,000] and the insurance companies were [predictably] not terribly excited about covering these repairs. Now the insurance industry has had its nose bloodied by consumers that fought back: Mold problems which could've been solved for several thousand dollars worth of repairs are now coming back to haunt insurers, in the form of huge civil court awards. A Dripping Springs family slapped Farmer's Insurance with a $32 million judgment last year because of Farmer's failure to handle their mold claim properly. Fine...but what does this have to do with my ability to buy a house? Plenty.
There's a little-known database that the insurance industry relies upon called CLUE: Comprehensive Loss Underwriting Exchange. Owned by Atlanta-based Equifax, CLUE's massive database tracks over 120 million auto and homeowner's insurance claims. Industry estimates indicate the CLUE system covers about 85% of the claims filed...meaning that water pipe that may have busted during a stretch of cold weather a few winters ago in the dream house you just put a earnest money down on could quite conceivably block your ability to secure financing. More and more insurance underwriters are scrutinizing the backgrounds of the properties attempting to obtain coverage than ever before, motivated by several factors. The fear of mold claims is big: If there has been water damage in the past, this will flag a property fast.
Multiple claims at a particular address of any type: Water damage, fire and our nemesis in North Texas, hail can be another red flag. And finally, if there are excessive losses in the neighborhood, this can give the prospective insurer another reason to rate the property as a higher risk [meaning a higher premium] or decline to cover it altogether. If you can't get the property insured, you're never going to be able to finance it. And if you are able to get it insured-but at a much higher annual premium level-you'd better know this and factor this added cost into your monthly house payment, or risk a rude and expensive awakening in the near future.
One more thing: While I've been addressing the purchasing side of the home buying equation, this will have just as much impact on the selling side, too. With all of the disclosure requirements nowadays, if you fail to note something big (in your property's past) to the prospective buyer, you could be setting yourself up for an expensive and distasteful courtroom experience if something goes wrong and the lawsuits start piling on.
Dose of Dover For The Week: I've pounded you for years about doing your homework and spending a few bucks to run a background check before buying a used car. It would be prudent to start thinking in the same terms when you're in the market to buy a pre-owned home. But here's the rub: You're not entitled to run one of these CLUE background checks unless you own the property. Solution? Have your attorney or savvy-broker include language in the purchase contract that makes your offer contingent on their providing you with a copy of a current CLUE report within 10 days of signing the contract, otherwise...? No deal. Find out more about this topic, and how to get a copy of these CLUE reports on my website: www.bendover.com/clueless.asp
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