By Robert S. Kutner, Esq. Partner, Casner & Edwards
Massachusetts buyers and REALTORS® have recently learned that difficulties in obtaining homeowners insurance will delay or prevent real estate closings. Understanding this potential pitfall will assist buyers and sellers to avoid problems and enable a transaction to proceed smoothly. If a buyer cannot get insurance coverage, that buyer will not get a mortgage. Hence, no closing. The problem may be compounded after a closing. If a buyer pays all or substantially all cash for a house and then gets turned down for insurance, the buyer will be caught between paying exorbitant premiums or “going bare” with no homeowner’s policy. Researching an available database can help avoid problems.
What Is a CLUE Report?
The insurance industry database is known as CLUE, short for Comprehensive Loss Underwriting Exchange. It is a voluntary database of consumer claims originally created by a company called ChoicePoint, then a division of Equifax, the credit reporting giant. ChoicePoint was purchased in February 2008 by Reed Elsevier, parent corporation of Lexis Nexus. Claims are tracked by individual and by property and are generally kept for five years. It is estimated that more than 600 insurers, or nearly 90% of homeowners’ carriers and 95% of auto insurers contribute and share data.
Today the insurance industry has become more sophisticated and may deny insurance coverage because of the claims experience of either the individual or the property itself. Should the insurer learn of undisclosed claims history after a closing, the insurer could refuse to renew the policy or cancel coverage. In some states, CLUE reports include calls that homeowners have made about potential claims, even if no payment was ever made.
Historically, experts suggested that having filed two claims within three years will subject an applicant for insurance to significant risk of being rejected. Property claims are reported for approximately 27 kinds of losses, ranging from dog bites to lightning, earthquake, flood, wind, hail, burglary, slip and fall, fire and vandalism. While certain types of claims will have no effect on coverage, some types of claims are used to determine if a property presents a greater risk of a future claim.
For example, water related claims magnify the risk of rejection of insurance. If a property has a history of water damage, it may increase the likelihood of a claim for mold infestation. Rather than using the claims history to make suggestions to eliminate the risk of a leak and to eliminate the development of mold, many carriers will simply avoid issuing a policy.
Obtaining the Report
The CLUE report contains information about the claimant or property such as name, date of birth, date of loss, type of loss and amounts paid, and a description of the property covered, including both home and automobile claims. The report also identifies parties that have received a copy of the report, usually over the most recent two years.
The CLUE report can only be accessed by the property owner or lender, not by every interested buyer. One way for a prospective buyer to obtain protection is to condition an offer on the seller obtaining and providing the buyer a copy of the property’s CLUE report as well as conditioning an offer on the buyer’s ability to obtain a homeowner’s policy. When taking a listing, it may be advisable for a listing agent to ask the seller about insurance claims for the prior five years, since a history of such claims could affect the sale and delay or prevent a closing due to the unavailability of insurance.
According to the Fair and Accurate Credit Transactions Act (“FACT Act”), one free report is available to a consumer/owner once every 12 months. If information is incorrect, the consumer may challenge its accuracy with the source of the data, just as with one’s credit report.
Along with the obvious benefit to insurers, CLUE is touted as a method to help home buyers and their home inspectors as well as being a marketing tool for home sellers who can promote the fact that their property has a “clean” claims record. It is estimated that two-thirds of all CLUE reports show no claims.
Several years ago insurance carriers notified thousands of policy holders on Cape Cod that they would not renew their homeowner’s insurance. Issuance of new policies is also affected. The explanation given by the Massachusetts Division of Insurance is that storm models predicted higher potential losses if a “storm of the century” were to strike Massachusetts coastal areas.
Homeowners whose policies are cancelled may be able to find a new insurer or obtain coverage from the Massachusetts FAIR Plan, the state’s insurer of last resort. FAIR Plan rates are set by the Massachusetts Division of Insurance. In total the FAIR Plan covers approximately 175,000 homes. Every insurance company doing business in the state pays into a pool to cover the FAIR Plan’s losses. It is backed by the Massachusetts Property Insurance Underwriting Association, which oversees the plan. The key is to apply several weeks before the closing date.