Most people that purchase a home will want to procure homeowner’s insurance at or immediately after closing. If a buyer is using financing to purchase the home, the mortgage lender will require insurance in order to approve the loan. Procuring insurance has not traditionally been a significant problem in the majority of residential transactions. However, we are seeing a trend in the insurance industry that is causing problems for some home buyers. Increasingly, insurance companies are requesting to review the buyer’s inspection report prior to issuing a commitment for property insurance. And in several transactions recently, we have seen insurers demanding major repairs to be made before agreeing to insure the property, even where the inspection report did not call for such repairs. The required repair we have seen most often is a complete roof replacement. As we all know, roof replacement is a major expense and not one that most buyers are willing to undertake.
What is a Buyer to do in this instance? Can the Buyer terminate the contract? If the inspection period has passed under an “As Is” contract, and the Buyer is paying cash, the Buyer cannot terminate without forfeiting their deposit. If the contract contains a financing contingency, the Buyer will also likely lose the deposit. It is true that the financing contingency allows the buyer to terminate if the failure to secure financing was due to a property related condition, but that is only if the condition was not otherwise waived under the contract. Arguably, this waiver occurred when Buyer did not notify the Seller of the roof issue before the end of the inspection period in Paragraph 12 of the FAR/BAR “As-Is” Contract.
Due to this recent trend in the insurance industry, we encourage Buyers to include the insurance addendum, Addendum N, to any offer to purchase property. By using this addendum, a buyer that is unable to obtain property insurance can terminate the contract without penalty. As always, should you have any questions regarding the foregoing we urge you to consult with an experienced real estate attorney.
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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