The Newest Insurance Crisis – Will You Be The Next Victim?
Will your next home purchase or sale fall through because of little fellas with names like stachybotrys, aspergillus, cladosporium, penicillium, fusarium, acremonium, alternaria, chaetomium, cladosporium, paecilomyces, or trichoderma? Will the sale tank because of the unavailability of property insurance because of past insurance claims? Will there be deposit disputes and commission disputes over whether the buyer’s default was excused? There is a crisis in the insurance business that is beginning to rear its ugly head, and it is increasingly causing home purchase transactions to fall through. It is over the “growing” (pun fully intended) problem of mold claims or claims for water damage that could lead to mold.
Many readers of this article will recall times in the past when obtaining “hazard insurance” or “property insurance” became problematic because of the spate of claims losses suffered by insurers following disasters such as wildfires or earthquakes. A similar situation is brewing today as a result of the exponential increase in the number and severity of mold claims being suffered by insurance companies. Farmer’s Insurance reports receiving 800 claims per month in California, up from 200 earlier this year! California insurance companies report that the average claim has increased to more than $36,000 from $3,000, according to Jerry Davies, a spokesman for the Personal Insurance Federation in California.
What many home buyers and sellers and real estate professionals do not know is that homeowners’ claims are recorded in a database maintained by the Comprehensive Loss Underwriting Exchange, or “CLUE”. Ninety percent of insurance companies subscribe to this service. Thus the claims history pertaining to a particular property or a particular homeowner is available to all insurance companies, even if the past claims were made to different companies.
Currently most insurers cover mold cleanup if it is part of a claim for sudden and accidental water damage, but not if it is mold that has grown over the years. Responding to the huge increase in mold claims, insurance companies have asked the Insurance Commissioner to allow policy restrictions and limit settlement for claims arising from mold. So far this request has been refused. So, in order to lobby for this change and apply pressure to the Insurance Commissioner, the industry is creating an insurance crisis by refusing to insure homes that have had water intrusion claims in the past three or five years or, in the case of some insurance companies, by withdrawing from the California market altogether.
If a buyer has removed the loan and inspection contingencies and then cannot meet the insurance requirements of the lender and thus cannot obtain the loan, is the buyer entitled to a return of the deposit? If the buyer is able to obtain insurance, but only at an unacceptable premium increase, is the buyer required to suffer the added expense and complete the purchase, accepting the house with the stigma of a negative claims history? How much additional premium is the buyer required to suffer – is the sky the limit? If the buyer is denied insurance because of past water damage claims and the seller did not check the “molds” box newly added to the Transfer Disclosure Statement this year, is the buyer excused from the purchase? Is the seller guilty of non-disclosure? These questions are now being faced by some of our clients, but the issues are new to this emerging insurance crisis and the outcomes will be unpredictable for a time.
As a realtor or broker, address the situation up front at the time of contract formation. Make it an express contingency for the buyer to obtain a commitment for insurance reasonably satisfactory to buyer and buyer’s lender within a prescribed number of days, and set forth that the inability to do so excuses further performance and entitles the buyer to a return of the deposit. Pay careful attention to the contingency removal provisions of your contract, in particular whether the parties are proceeding according to the passive or active methods of contingency removal such as are found in the California Association of Realtors contract, and explain these to your principal.
As a seller, you can consider obtaining your own CLUE report. Homeowners can contact their insurance broker to inquire about obtaining a copy of their CLUE report. If a seller has a known history of water damage, an inspection and toxicology report by an industrial hygienist will range from about $1,500 to $3,500.
As a buyer, start shopping as soon as the contract is signed, and make sure you contact more than one insurance company, not just your preferred company. You might consider asking the seller to provide the CLUE report as a condition of the sale.
Ask your broker or our office for a form of Insurance Contingency Addendum to use with each new transaction. If your office doesn’t have one, we would be happy to prepare one for you. Feel free to e-mail us or mail us a return envelope with your request.
This article written and © Peter N. Brewer, Esq.
The Law Office of Peter N. Brewer (www.BrewerFirm.com) serves the legal needs of homeowners, real estate and mortgage brokers, agents, brokerages, title companies, developers, investors, other real estate professionals and their clients. Mr. Brewer and his firm also represent clients in debt collection, breach of contract matters, and other litigation and transactional work. The firm’s client range from homeowners, brokers and lenders based in Santa Clara County, San Mateo County, San Francisco County, as well as throughout other counties in California.