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Clue Reports: The Next Seller's Disclosure
After years of staggering losses, the insurance industry has recently made some interesting changes!
Insurers have raised property insurance premiums as much as 50 percent in some areas such as California and Texas, and are limiting their coverage and liability for events associated with water damage and the growth of mold. Insurers are refusing to write new policies in some states with a high number of water damage claims.
It's a real estate industry nightmare, and it is only getting worse. Insurers are looking for all the ammunition they can get to avoid losses.
Now Realtors are reporting that some insurers are refusing homeowner's coverage to buyers on some homes which have had prior claims.
"It has happened to us," says Mick Curtis, vice president of Long and Foster Realtors, Inc. Curtis declined to give specifics about his sellers' situations, but used this example to illustrate how prior claims on a property can kill a real estate transaction.
"Four years ago, if the seller had a leak in the roof, there may be moisture remaining there that may lead to mold," he says. "The buyers could be declined insurance not because of anything they have done but because of the history of the house."
How can that happen?
Insurers have access to a ten-year-old database called the Comprehensive Loss Underwriting Exchange Property Database (CLUE). This database tracks claims on properties and property owners. CLUE is a voluntary repository supplied by carriers of homeowner's insurance policies for the nation. It can tell an inquiring insurer the name and address of the policy holder, and whether there have been claims for water, earthquake, tornado, fire and other losses, and the damage claim amount paid out.
If the insurer thinks the house is a poor risk for another catastrophe, a homeowner's policy can be refused to the buyer. Without insurance, the buyer can't get a loan, and that's a hurdle that has some agents taking pre-emptive action.
Curtis says his company is changing the way it trains agents to deal with this issue.
"When we take a listing, one thing we do is interview the seller to find out possible obstructions that could be posed to the seller that they aren't aware of," says Curtis. "For example, one thing is second mortgages and liens, and they might not realize that they have to bring money to settlement. We have an interview where we try to find out everything about the house, so there aren't any surprises at settlement.
"We now tell agents to ask, 'Have you made a claim to your insurance company in the last five years?' If the seller has, we ask them to contact CLUE, where they can see if their house has been put in the CLUE database. If they are aware of it, they can tell the buyer the situation," continues Curtis.
What if there was a leak that the seller filed a claim to have fixed? "If there is a report," says Curtis, "we want to find out the nature of it, and then we determine whether or not it is likely to red flag the property to insurers. If the claim has anything to do with water, it is likely to be a red flag. Then you need to inform the buyers agent that this situation exists before they go to contract."
What about the buyer? "We are telling buyers to get insurance coverage right away," suggests Curtis. "As soon as you become the contract purchaser, contact the insurance company and make sure the house is insurable."
According to Choicepoint.net, the developer of CLUE, the CLUE Property Database is also available to consumers.
Richard Collier, Vice President of marketing and sales for ChoicePoint, says that the CLUE reports are an important tool for buyers and sellers, but cautions that they can't be used to check out properties. CLUE property reports can be obtained by the buyer concerning his own claim records, but the buyer cannot access the seller's report except through an insurance agency which may say whether the house is insurable, or unless the seller gives the buyer a copy of the report.
"I wouldn't buy a home unless the seller gave me a copy of their CLUE report," says Collier. "Realtors will be at an advantage when they do a listing to have the sellers come to ChoicePoint and obtain a copy of their CLUE report to show potential buyers."
Collier adds that potential problems don't always come from the seller. Buyers need to be aware of their own claim histories, especially if they have had multiple claims. Buyers with histories of frequent claims are also being turned down for coverage on their next home purchases.
“If there were claims for a burglary because there were no alarms, and a fire claim because a pan of grease caught fire in the kitchen, the insurer may assume that this person is claim-prone,” says Collier.
For those reasons and more, ChoicePoint is making a variety of reports more readily available to consumers.
The first product for consumers is insurance scores, which have been available since 2002. Insurance scores work much like credit scores for an individual making loan application. Insurance scores predict future losses.
Beginning September 2002, CLUE property reports have been available at www.choicetrust.com. Collier notes, “The CLUE property reports only denote claims. Seven out of ten CLUE reports have no claims, so most should get a report that says “No Claims on File.” Out of the remaining three in ten reports, there are 18 to 20 different loss types, from burglary to slip and fall injuries. For buyers, armed with this information, the report may be a bargaining tool to negotiate the best rate possible.
Says Curtis, “The important thing to know is that, yes, CLUE reports are being used, and can be a real problem if insurance is not taken car of until the last minute. If the sellers are in the CLUE database, we can deal with the issue before it goes to settlement. There are insurance companies that don’t use the CLUE to determine rates, but we want to prevent the worst-case scenario, that the buyer has gone through the whole buying process and then are told by their insurer that they can’t get a policy for the house they are buying.”
Will CLUE reports become a standard disclosure for sellers? Will agents insist that buyers get pre-qualified for loans and get a copy of their insurance scores before they take them home-viewing? What was just a trend in 2002 has become commonplace today.