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Professional Standards Manual

Trading Services

4. General Information

(a) Contract Clauses - View Entire Section

(XXII) Disclosure Issues - View Subsection
(2) Fire/Property Insurance

Insurance companies are more frequently declining applications for insurance coverage from individuals who have a bad insurance claim history. If, in the opinion of the insurance company, an individual has had too many claims, the insurance company may decline to provide fire/property insurance. The individual may have an existing policy in place with an insurance company but when he or she attempts to insure a different property, he or she finds the insurance company no longer wants his or her business.

A second scenario involves the property itself. The current owner of a property may have had insurance on that property for many years and the insurance company continues to provide fire/property insurance. However, when the property is sold and a new buyer applies for insurance, the insurance company may deem at that time that the property no longer qualifies for insurance coverage. This could arise where the electrical service is less than 100 amps, or the roof is old (perhaps 25 years or older), or where the home contains galvanized plumbing, old wiring, or a wood stove that has not passed inspection. With the exception of wood stoves, the insurance provider may consider these unresolved maintenance issues.

In a typical real estate transaction, the issue of fire/property insurance is not addressed until after the conditions are removed and, in some cases, closer to completion date. If the buyer is unsuccessful in obtaining fire/property insurance, the mortgage company is not protected and will not provide mortgage funds. The end result may be a collapsed transaction, the buyer’s deposit may be at risk, and the seller may suffer losses as a result of the transaction not proceeding.

To adequately protect your clients, the issue should be discussed with your client, including the potential problems that might arise if the buyer were unsuccessful in obtaining insurance. The buyer should decide if a clause should be included in the offer to confirm that the property and the buyer qualify for insurance coverage. The following sample clause could be included in a Contract of Purchase and Sale in such circumstances.

Fire/Property Insurance Clause

This offer is subject to the Buyer obtaining approval for fire/property insurance, on terms and at rates, satisfactory to the Buyer, on or before (date) .

This condition is for the sole benefit of the Buyer.

Ω If not using the standard form Contract of Purchase and Sale, refer to ‘‘Contracts under Seal’’.