- Insuring Florida Property: Buyer Must Plan Ahead
New Insurance Crunch Threatens Home Ownership
By: Raymond J. Bowie, Esq.
A new property insurance crisis threatens the purchase, sale, financing and ownership of Florida real estate to a degree not seen since Hurricane Andrew.
Available and affordable homeowner insurance is especially essential to property transactions requiring mortgage financing: If a buyer cannot insure a property, a mortgage lender will not generally finance it; and if a property cannot be financed, most buyers cannot buy it and the seller likely cannot sell it.
Ten years after Hurricane Andrew, many Floridians have only dim memories of the other storm which followed in Andrew’s wake: The previous homeowner insurance crisis – the “insurance tsunami” of unpaid claims, fleeing insurers, mass cancellation of homeowner policies and the flood of staggering rate increases. In the ensuing years, homeowner insurance had become more readily available, and rate increases at least moderated. Hence, in 2002 Floridians were scarcely prepared for… Insurance crisis redux.
Recent developments in homeowner insurance have hit Florida buyers, sellers and home owners every bit as hard as a Category 5 hurricane:
- Florida’s largest property insurer, State Farm, cancelled some 4800 condominium policies and has stopped writing new homeowner policies.
- State Farm took these actions even after winning statewide rate increases this year averaging 22%, and in some counties as high as 42%.
- Florida’s second largest insurer, Allstate, will not insure seasonal residences or second homes, claiming higher risks of water damage and mold claims in unoccupied properties.
- Many insurers are canceling homeowner policyholders if they file two claims on their policy, no matter what the cause or amount, within any three-year period. In some cases, even one single water damage claim can lead to cancellation.
- Cancelled policyholders are then finding that because insurance companies share claims databases, they or their properties may become “stigmatized”. Replacement coverage, if any, may only be available at much higher rates from “surplus line” insurers..
- To retain coverage, many policyholders are being forced to accept higher deductibles and severe limits on claims related to water damage and mold.
- And to cap it all off, homeowners needing to secure or renew flood insurance after January 1st will find it unavailable – and be unable to obtain mortgages as a result.
The reasons for the latest insurance crisis are many and debatable. Insurance companies claim that homeowner property and casualty insurance is never more than marginally profitable in good times, and that recent times have not been good. They cite the 9-11 tragedy, recent natural disasters, mold litigation and perhaps most honestly, their own lost earnings from the stock market as causes of the industry’s $7.9 billion net loss last year, its first-ever net loss.
Whatever the reasons, the effect is undebatable: Florida property owners are finding it tougher and greatly more expensive to retain their existing insurance coverage – and buyers are again finding insurability to be a major impediment to purchasing and financing real estate.
One new factor complicating the availability of property insurance is the development of massive nationwide computer databases shared by insurance companies in making underwriting decisions about properties and property owners. Over the past 10 years or so, major insurance companies have been creating nationwide repositories of information on their insureds, the nature of their insurance claims and the properties on which claims are made. These databases can now be accessed by insurance companies to evaluate an insurance applicant’s history of making claims as well as the claims history of any particular property. Armed with this information, insurers are increasingly declining applicants or properties with an “adverse claims history” – creating categories of “stigmatized buyers” and “stigmatized properties” based upon as little as two claims.
Insurance companies have also recently begun checking applicants’ credit scores utilizing these same databases, claiming that actuarial studies have shown a correlation between an insured’s credit rating and his insurance claims. Insurers are increasingly declining to insure applicants with bad credit or low credit scores. While controversial, only two states, Hawaii and Maryland, have banned the practice.Currently, more than 90 percent of the insurance claims made in the United States are maintained – along with credit histories – in one such shared database, the Comprehensive Loss Underwriting Exchange, or CLUE. CLUE has, as a result, become the industry standard for underwriting property insurance applications.
Insurers regularly obtain CLUE reports going back 5 years on any claims made either by the applicant or on the real estate the applicant seeks to insure. CLUE can also provide the applicant’s credit report and credit score. Insurance companies may then decline to insure for one of three reasons: First, because the applicant has made too many claims on other properties in the past; Second, because the applicant’s credit looks too risky and might correlate with likely claims in the future; or Third, because the property has had too many insurance claims on it made by prior owners.
If this new insurance underwriting practice is not daunting enough for property buyers, a further crisis has just arisen in the availability of flood insurance, coverage for which is not included under basic homeowner insurance policies. Effective January 1st, thanks to Congress adjourning without funding the national flood insurance program, Federal flood insurance will not be available either for purchase or renewal. Since flood insurance is required for all mortgages on properties located in “special flood hazard areas” (flood zones “A” and “V”), the unavailability of such insurance may derail many real estate closing occurring early next year – or at least postpone such closings until sometime after the new Congress meets on January 7th and approves the 2003 funding.
Seemingly besieged on all insurance fronts, what should a prudent home buyer do?
Obviously, the buyer needs to protect himself against potential uninsurability before becoming obligated on a sales contract to purchase a particular property. If the buyer enters into a contract and subsequently fails to obtain property insurance required at closing by his mortgage lender, the buyer may not be able to close, causing him to default on the contract and possibly forfeit his deposit money to the seller. The buyer must, therefore, be able to determine insurability either prior to entering into a sales contract or under a contingency written into the sales contract.
There are several ways a buyer can do this prior to signing a contract:
- As regards the impending flood insurance moratorium, a buyer can easily ascertain whether a property lies in an “A” or “V” flood zone and make his contract offer contingent upon being able to secure Federal flood insurance by the closing date or to defer closing until the insurance is again available. If the buyer is already under contract to close on such a property in January, the buyer should pay his flood insurance premium well in advance of January 1st with the coverage to be made effective on the scheduled closing date. Likewise, any homeowner whose existing flood policy renews in January should make his premium payment early in December.
- As regards other insurance issues, the prudent buyer should check out his own personal insurability before making any contract offers to buy property. The buyer can order and obtain his own personal CLUE claims rating online for $12.95 by accessing the CLUE database at www.choicetrust.com. If it shows two or more claims made, the buyer should have the report evaluated by a good insurance agent to ascertain if there may be an underwriting problem. Next, the buyer should make any sales contract contingent upon being able to confirm the insurability of the property he is buying and the acceptability of the insurance premiums.
- If the property is a condominium unit, the seller should be required to document that the condominium’s “master insurance policy” has adequate commercial general liability coverage and replacement-cost hazard coverage, including flood and windstorm coverage if appropriate for the location.
- If the property is not condominium unit, the seller should be required to produce a copy of the seller’s current homeowner insurance policy (and flood and windstorm policies, if appropriate) documenting the coverages, the premiums, and the insurer and agent. The seller should also disclosure any insurance claims made on the property within the past 5 years. And to confirm this, the seller should also be required to provide the CLUE claims history on the property, which is easily accessible to the seller online.
- Having procured these disclosures, the buyer should have then them evaluated by his insurance agent for possible underwriting problems and to quote his insurance premium. A sales contract contingency can be written in such a way that the buyer can terminate the contract if there is an underwriting problem or the insurance premiums quoted are unacceptable to the buyer.
- If insurance is available to the buyer but the premium quoted is high, the buyer should consider raising the policy’s deductibles – perhaps up to $1,000 – as a tradeoff for reducing the premium.
Historically, property buyers have not had to take these kinds of extraordinary precautions dealing with homeowner insurance. These are, however, extraordinary times.
And as they say, extraordinary times require extraordinary measures – lest the buyer and his dreams of Florida homeownership be swept away in the current insurance tsunami.