The Best of the Legal Hotline: Insurance Issues Facing Consumers


 Tracy Rucka & Debbi Conrad  |    July 06, 2005
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The following questions and answers highlight some typical insurance issues in real estate transactions.

Electrical service

A buyer wrote an offer on an older home that has fuses rather than an updated electrical system. The buyer became concerned when she heard that it might be impossible to get homeowner’s insurance because of this. Is this a concern? 

Some buyers have been unable to obtain homeowner‚Äôs insurance for properties with 60-amp service or fuses. Modern appliances and computers are likely to overwhelm a 60-amp electrical system ‚ÄĒ for example, a microwave could blow it out. Today‚Äôs minimum requirement is generally 100 amps. Likewise, fuses instead of circuit breakers are very dangerous because they can be tampered with, such as using a penny to replace a blown fuse. This is a major safety issue because most fire losses are electrical.

Knob and tube wiring, popular until about 1950, is ungrounded and antiquated, and aluminum-branch circuit wiring, used from the mid-1960s to the late 1970s, is a fire hazard. Insurance companies may deny coverage if a house has one of these types of wiring.

Buyers purchasing an older home can ask the real estate agent or the seller about the electrical system when they attend an open house or a showing. Another source of information is the Real Estate Condition Report (RECR), completed by the seller to disclose any possible problem areas with respect to the condition of the property. If your question is not satisfactorily answered, ask your REALTOR¬ģ about the provisions you can put in your offer to purchase for an expert inspection of the electrical system, to require that the seller upgrade the system, or to find out in advance whether you can get insurance on the existing electrical system.

CLUE reports

There was a major flood and a severe hailstorm recently in the area where the buyers are looking for a home. How can they get information about whether the property they are interested in was damaged? 

You can certainly ask the sellers or their real estate agent. These issues should also be addressed in the RECR that the seller has prepared. Another, more objective way to learn about past damages to the property is to ask the sellers for a copy of their Comprehensive Loss Underwriting Exchange (CLUE) report. CLUE is a loss history information database developed by and used by insurance companies to share information about insurance claims, reported losses and damage, and even insurance policy inquiries with respect to properties and individuals. CLUE reports include all such information reported within the last five years.

If the sellers do not have a CLUE report, have your REALTOR¬ģ include a provision in your offer to purchase requiring the sellers to provide their CLUE report. The CLUE report will contain a record of the calls made to insurance companies related to damage to that property, including any flood or hailstorm damage, and any other claims made within the last five years.

Insurability

I am going to be buying a house for the first time. How do I go about getting homeowners insurance, and what factors should I be aware of? 

  1. Get a copy of your credit report and correct any errors or problems at least six months before you start looking for a house. You know that your credit standing will influence your ability to get a mortgage loan, but it may also affect your ability to get insurance at reasonable rates.
  2. Ask your insurance agent for information about application procedures and any property conditions or lifestyle issues that may cause an insurance company to refuse homeowner‚Äôs coverage or charge additional premiums. Many insurance companies have suffered heavy losses in recent years and are taking measures to limit their risk. Insurers are increasing premiums, excluding homes with water damage or mold claims, requiring an upgrade for 60-amp electrical service, and generally tightening their underwriting criteria. Some insurance companies are refusing homeowner‚Äôs insurance coverage for homes with a trampoline, swimming pool ‚ÄĒ especially those with diving boards, or feisty dogs such as pit bulls, Doberman pinschers, rottweilers or chow chows.
  3. When you are ready to look for a house, get your credit score or insurance score and your CLUE Report. Many insurers may use your credit or insurance scores and the CLUE database when deciding whether they will issue homeowner’s insurance. Your credit score and insurance score are both based on your credit history, but a credit score is designed to predict whether a person will pay their bills on time, while an insurance score is designed to predict whether a person will have insurance claims. The insurance companies believe that people who are not careful about paying their bills on time and managing their credit are likely to be similarly careless when it comes to dealing with routine maintenance or how they use their property, and will generate excessive claims.
  4. Once you find a property that you want to buy, learn as much as you can about the property’s history. If the seller does not give you their property CLUE report upon request, put a provision in your offer to purchase requiring the seller to furnish this information.
  5. Apply for homeowner‚Äôs insurance early ‚ÄĒ do not wait until the last minute!

Homeowners insurance information

Floodplain insurance

The sellers received a letter from their mortgage company stating that their property was now in a hazardous flood area and they had to get flood insurance. The village and the Federal Emergency Management Agency (FEMA) both say the property is not in a flood zone. Who decides whether a property is in a floodplain and whether flood insurance is required? 

Floodplains are normally dry or semi-dry land areas to which water naturally flows as water levels rise. Floodplains are typically found near rivers, lakes and the coast, however, many of Wisconsin’s flood-prone lands are simply low-lying areas or depressions where water naturally collects when it rains.

FEMA’s Federal Insurance and Mitigation Administration Hazard Mapping Division maintains and updates the National Flood Insurance Program maps. The flood hazards shown on National Flood Insurance Program (NFIP) maps are based on the best information available at the time the maps were prepared. In many areas, hydraulic and hydrologic studies were conducted to reflect the long-term projection of flood risk. Structures located in the floodplain or a Special Flood Hazard Area (high risk) shown on the maps have a significant chance (26 percent) of suffering flood damage during the term of a 30-year mortgage. If your house is in these high-risk areas, the mortgage lender is obliged by law to require that you buy flood insurance as a condition for receiving a federally backed loan.

Flood insurance resources

Home warranties

The buyer saw a MLS listing that said that a home warranty program was included. When the agent working with the buyer wrote the offer to purchase, the home warranty was not mentioned. At closing, the buyer was told that he had to pay for the warranty because it was not mentioned in the offer. Is that true and is it important to have a home warranty? 

Yes, the buyer would need to ask the seller to provide the home warranty in the offer to purchase because the offer determines the agreement between the buyer and seller. The listing contract or the MLS sheet only expresses what the seller is willing to include in the offer ‚ÄĒ the information there is not automatically included in the sale.

The typical home warranty is a one-year service contract that protects a homeowner against the cost of unexpected repairs or replacement of major systems and appliances that break down due to normal usage. A home warranty generally covers breakdowns in major systems like plumbing, electrical, heating and air conditioning, as well as washer, dryer, oven, refrigerator and other items.

 Editor’s note: The DRL became the DSPS in 2011. Information above may not be current.

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