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Insurance Issues

There has been a growing concern in the real estate industry about the escalating cost and availability of property insurance. Companies have refused to insure homes that have been previously covered. In other cases, companies have decided to raise insurance premiums by a considerable amount. Some properties involved in insurance coverage issues have real or perceived environmental problems, such as oil tanks, fire places, or mould. Other insurance issues develop because of outdated wiring or heritage status. For these reasons there is an increasing incidence of offers to purchase have the condition, "Subject to the insurability of the Property".

Provincial governments are responsible for the regulation of the insurance industry, including the cost of premiums and the availability of products. The federal government's responsibility is limited to ensuring that insurance companies are financially sound. The federal government obtains assurances from the Office of the Superintendent of Financial Institutions (OSFI) that the investment portfolios of insurance companies are not excessively risky.

If you're involved in buying or selling a home you have to think about insurance. It could affect whether or not the transaction will complete.

Home insurance companies have tightened their underwriting criteria and they're reluctant to take on risks that may not have bothered them in the past. What's at stake for buyers and sellers is not just the insurance, but mortgage financing as well. Banks won't advance mortgage funds unless there is proof of insurance.

A number of insurance issues have been identified that can impact the transaction process. These issues can include:

  • Aluminum wiring – demands to retrofit and/or change completely to copper.

  • 60 amp electrical services – not deemed to be sufficient regardless of the size of the dwelling.

  • Knob and tube wiring.

  • Gas furnaces more than 20 years old.

  • Oil tanks.

  • Wood burning appliances – Wood Energy Technology Transfer (WETT) certification is being measured against current building codes.

  • First time buyers without prior home insurance history.

  • Insurability point system now used by insurers which may be detrimental to first time buyers. This includes "red zoning" because of the location of the property.

A skilled and knowledgeable home inspector will address these issues when he does a home inspection. Once the inspection is complete the buyer should take the home inspection report and a copy of the listing feature sheet to his insurance agent to confirm that the home qualifies for property insurance. Alternatively a seller could have a home inspection complete before receiving an offer to purchase then taking the inspection report and a feature sheet of his listing to an insurance agent and obtaining written confirmation of insurability of his property.

Definitions to Know

Just as real estate has its own technical terms, so does the insurance industry. Here are some of the terms you need to be familiar with.

All Risk or All Peril

The term "all risk" or "all peril" describes insurance for losses due to a wide range of causes. Instead of listing each insured peril, such as fire, lightning and so on, the policy covers all loss or damage to insured property that is the result of any "risk" that is not specifically excluded. "All risks" is a confusing insurance term and does, in fact, incorporate numerous listed exclusions, allowing coverage to be priced more fairly. Perhaps a better description would be "all common risks".

Bylaw Endorsement

When construction codes and zoning bylaws change, existing buildings are usually exempted. But when a severely damaged building has to be substantially rebuilt, the entire building may have to comply with current standards. The "by-law" endorsement covers any additional expenses to bring the building up to standards.

Comprehensive Policy

The term used to describe a policy providing broad protection. This is sometimes also referred to as "All Risk" Coverage limits. In addition to overall dollar limits for liability, there are sub-limits on the amount that can be claimed for some items. Some items typically subject to coverage limits include negotiable securities, cash, garden tractors, computer software, bicycles, jewelry and gems, watches, or collections (coin, stamp, card, etc.).

Deductibles

Most insurance claims are subject to a deductible - the initial amount of every claim that is paid by the policyholder. Deductibles help make insurance more affordable for everyone by eliminating minor "nuisance" claims.

Direct Loss

The term used to describe the loss or damage of insured property or goods. The term does not include other losses or expenses incurred as an indirect result of the damage, such as having to rent a video camera if one is destroyed by fire shortly before leaving on a trip.

Discounts

Some insurers offer discounts or other incentives for policyholders who install smoke alarms, sprinkler systems, and monitored intruder alarms. Some reduce premiums for seniors. Some insurers offer discounts to loyal, long-term policyholders. The insurer may also be willing to offer a discount if they insure both the car and home with them.

Dwelling

Your "dwelling" coverage applies to your home and "attached structures" such as a garage or carport. Permanently installed outdoor equipment on the premises, such as a swimming pool and the equipment attached to it, is included. Building materials for use in construction, alteration or repair of the insured dwelling or related structures on the premises are covered as well if they are on the site or adjacent to it.

Guaranteed Replacement Cost Endorsement

This endorsement will make up a shortfall in the event that the replacement cost of the home is underestimated.

Named Peril Coverage

This is a policy that covers losses that result from causes specifically listed. This is the opposite of an "All Risk" or comprehensive policy.

Personal Liability

The personal liability portion of home insurance applies at home, or anywhere in the world for bodily injury you may unintentionally inflict on others – often referred to as "third parties" - or to accidental damage you may do to their property.

Personal Property

A home insurance policy will cover the contents of the home and other personal property that is owned, worn or used (including clothing, cameras, furniture, etc.) while on your premises. It may even cover uninsured personal property of others, excluding roomers or boarders who are not related to you.

Risk

Term used to describe a chance event that is unexpected and accidental as far as the policyholder is concerned.

Subrogation

The term used when an insurer tries to recover some or all of its costs in settling a claim by suing others responsible for the loss. The effect is roughly the same as if you sued the responsible party, except that you are compensated faster by your own insurer.

Uninsurable Perils

Home insurance is generally intended to help policyholders cope with the financial consequences of unpredictable events that are "sudden and accidental." Predictable events, such as flooding of a home built on a flood plain, or preventable events, such as frozen indoor pipes, are not covered. The perils that are generally uninsurable include water damage caused by floodwaters, or damage caused by the freezing of indoor plumbing.

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