Purchasing a new home is often times considered to be the single largest financial investment in a person’s life. Given the scale of this investment, it comes as no surprise that Buyers desire to obtain homeowner insurance policies to protect their homes. However, what happens when the Buyer is unable to bind their homeowner’s insurance policy because there is an open insurance claim on the property? Given the recent uptick in insurance claims due to the fallout from Hurricane Ian, this situation is appearing much more frequently and causing problems at the closing table. This week’s blog will discuss how both the “AS-IS” and Standard FAR/BAR Residential Contract For Sale And Purchase (“Contract”) address homeowner’s insurance and the options that Buyers have when facing an open insurance claim on a property they are purchasing.
Is There a Homeowner’s Insurance “Contingency” Built into the FAR/BAR Contracts?
The answer to this question is that it depends. While both the AS-IS and Standard FAR/BAR Contracts do not have explicit provisions that allow a Buyer to terminate the Contract based solely on their inability to bind their homeowner’s insurance policy, the analysis would turn on whether the transaction is cash or financed. If the transaction is cash, the Buyer’s inability to bind their homeowner’s insurance policy will not allow the Buyer to unilaterally terminate the Contract. However, if the transaction is financed, the Buyer may be able to terminate the Contract due to the fact that obtaining a homeowners insurance policy is a lender requirement that is a condition for receiving their loan.
An Open Insurance Claim is Discovered, Now What?
There a three (3) main options that the parties to a real estate transaction can utilize when an open insurance claim is discovered:
- Close Out the Claim Prior to Closing
Closing out the open insurance claim prior to the closing date typically allows the Buyer to bind their insurance in time for closing. A Seller may be motivated to close the claim out and forego the insurance money if they need the property sold. However, this process takes time and the new insurance carrier may request documentation showing that the claim was closed in addition to satisfactory proof that the repairs, which were the subject of the claim, were completed.
- Escrow Holdback
An escrow holdback of a portion of the Seller’s proceeds is another option that can be utilized to resolve the open insurance claim issue. This involves holding back a portion of the Seller’s proceeds, to ensure that the claim is properly closed out, and closing the transaction over the open insurance claim. Proceeding with the escrow holdback in this situation may allow the parties to close on time, however, this would need to be approved by the lender on a financed transaction. Further, utilizing this option means that the Buyer would likely have a period of time where they owned the property and did not have a bound homeowner’s insurance policy which could expose the Buyer to liability.
- Extend Closing Date
Extending the closing date is another option that can be utilized. If both the Buyer and Seller are in no rush to close, an extension will give the Seller time to both receive the proceeds from the insurance claim and have the claim properly closed out. Once the claim is closed out, the Buyer can then bind their insurance prior to closing on the property.
It is important that the parties to a real estate transaction, as well as their agents, act quickly when an open insurance claim is discovered to avoid any potential delays with closing. If you have any questions or concerns regarding an open insurance claim pertaining to a real estate transaction, please reach out to your trusted real estate attorney.
