Imagine
working long and hard with a first-time buyer to find a suitable
property, diligently following up on the appraisal and title reports,
ordering
inspections and receiving a loan commitment, only to discover a few
days
prior to closing that the buyer cannot obtain the insurance necessary
to
purchase the property. The lack of hazard insurance availability
combined
with skyrocketing insurance policy premiums is beginning to disrupt the
real
estate industry. In addition to the increased cost and lack of
coverage,
many would-be homeowners and their agents have found a day before
settlement
that they cannot close on their properties.
THE
BACKGROUND
For
insurance
companies, the risk-to-loss ratio tells the story. Beginning with
Hurricane
Hugo in the Carolinas in the late eighties, the U.S. has experienced an
unprecedented
trail of weatherrelated destruction. Hurricane Andrew devastated South
Florida and swept across the Gulf Coast to Louisiana; Hurricane Oniki
hit Hawaii;
fires and earthquakes decimated California; the Mississippi flooded
three
times, and drought hit the West. In 2001, the September 11 terrorist
tragedy
bled companies of billions of dollars. With little time to recover,
insurance
companies began to receive thousands of mold-related claims with
millions
of dollars in settlements and jury awards. Insurance companies are
struggling to fill their financial reserves and are very reluctant to
issue new policies
where at risk. Insurance companies are canceling existing policy owners
and/or
reducing their financial exposure by adding dollar limits to claims.
Some
companies, such as Allstate, are pulling out of some states altogether,
leaving
property owners with fewer insurance choices and higher premiums.
GOVERNMENT
INTERVENTION
Some
argue that it is
time for government intervention while
others claim the forces of supply and demand are at work. As prices
increase
for those owners with coverage, insurance coffers will fill, policies
will
become more available and premiums will drop. In the meantime,
concerned
real estate agents and surprised consumers need to be aware of the
insurance
disruption and take precautions to avoid being caught in the snare.
RISK
FACTORS
While
never used
alone, consumer credit scores along with other risk
factors can certainly cause a scarcity of coverage for home purchasers
and
existing policy holders. Insurance companies use financial history
combined
with other factors and previous claims when underwriting. Specifically,
two
areas are examined: 1) The likelihood that the property will experience
a
loss. The geographical area of the property is a factor here. 2) The
likelihood
that an individual will file a claim. As inconceivable as it seems,
there
is a statistical correlation between the lower credit scores and
specific risk for insurers. The insurance industry cannot explain the
reason, but
the lower an individual' credit score, the greater the likelihood of
loss. Some factors also enhance the possibility of difficulty in
finding homeowners
insurance. Homeowners who own certain dog breeds, such as Dobermans,
chows
and pit bulls, may find that they cannot obtain coverage-at least for
acts
caused by their pets. Hot tubs, pools and trampolines increase
liability
and premiums, too. A second home with infrequent occupancy is risky as
are properties located within high crime areas.
PRECAUTIONS
There
are a number
of actions that real estate educators can pass to their agent-students
and
consumers to avoid the difficulty of obtaining coverage:
1. Check your own
credit reports and credit score. Individuals can obtain their own score
at
www.Myfico.com. Obtaining one' score will not ding or lower the score.
Fico
will work with consumers for a $49.95 fee and pledges to raise the
score
in a six month period of time. This is an important factor as 50% of
the
credit reports are estimated to contain errors which can lower the
score.
2. Obtain a Comprehensive Loss Underwriting Exchange (CLUE) score for
the
property you hope to purchase. You can use a variety of sites: www.ChoicePoint.com
is good. The $12.95 report will provide
information about how many claims have been filed on this
property over a period of time. Generally, homes that have had two
claims in five years will be difficult to insure.
3. Comparison-shop for the best coverage for your needs. Do not
misrepresent the problems with the property. Doing so could make
it impossible to receive claim monies. One Farm Bureau insurance
agent recently stated that contacting a dozen insurance companies
and agents would not be too many.
4. Choose the highest deductible possible to lower premiums. Look
for other ways to lower your premiums by installing smoke detectors
and burglar alarms. Remove possible risks to your property,
such as tall, fragile trees that can fall on a home during a storm.
5. Avoid submitting minor and nuisance claims, especially those
claims that are water-related. Also avoid talking to claim departments
for an inquiry, since talking to a claim department representative
could count as one claim.
6. Consider purchasing a separate home warranty policy at the
time of purchase for coverage of the mechanical components in
the home. These policies are widely available; many times a seller
will offer this coverage to a buyer. These home warranties are
renewable for an existing homeowner and relatively inexpensive.
A home warranty policy is a good substitute for the higher
deductible on the fire and hazard policy.
7. Check with your state authority to see if there are special programs
for homes in high risk areas.
More often than not, adequate insurance coverage is a privilege,
not a right, and the involvement of the consumer and licensee at
the early stages of shopping can make a difference.
|
| Penny
Alston, DREI, GRI, was originally licensed in
New Mexico. She has a B.S. from the University of
West Florida in Business/Adult Education. After 18
years in sales, Penny maintains sales and instructor
licenses in Utah and Florida, but her main focus
is real estate education. She teaches GRI courses
in Utah, licensing classes in both states, develops
courses, and writes exams. Penny can be reached
at skialston@earthlink.net |