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What is Insurability
Insurability is the ease of obtaining coverage for a property at a rate similar to the market average.
Insurability Is Determined by Insurance Companies
Insurance companies assess every risk they are considering coverage to determine their willingness to assume the risk and at what rate. In other words, insurance companies can decide to provide coverage, to not provide coverage, or to provide coverage at an increased rate. These outcomes are influenced by both an insurance underwriter and an insurance broker because they both have a financial stake. The combined decisions of all the underwriters and all the brokers in a particular market is a reflection of the insurability of a property in that market. If no underwriters were willing to assume the risk, and no brokers were willing to sell an underwriter's policy, a property would be considered to have no insurability, or to be uninsurable. However, if just one underwriter and broker refuse to insure a property, this does not mean insurance cannot be obtained from others.
Assigning Risk and Poor Insurability
A property is usually not uninsurable, but it may be more difficult to insure, or it may be assigned a higher rate (cost), and is therefore considered to have slightly lesser, or even poor insurability. This is due to a perceived increased risk by the insurance companies. These risks include general characteristics of the property, like the presence of a fireplace; the exposure of the property to natural forces, such as being in a flood plane; the presence of old or outdated components, like knob and tube wiring; and deficiencies, such as an actively leaking roof or an incorrectly installed wood stove. Insurance companies will have a number of questions about a property to be insured and may ask question such as the examples provided in this blog.
Poor Insurability & Consumer Choices
Remember: the decision to insure, or not to insure, is a combined decision of an insurance underwriter and an insurance broker. If a property has poor insurability according to one underwriter, a consumer may ask what other underwriters a broker negotiates insurance for compensation. Since insurance brokers may have some financial interest in the number of claims in their portfolio, brokers may also have some input on the decision to insure. If a broker increases rates or refuses to insure a property, a consumer can contact other brokers. For a list of insurance brokers in Newfoundland and Labrador, see the Insurance Brokers Association of Newfoundland, Find a Broker page.
- Insurance companies decide what risks they will assume.
- Insurability cannot be determined by home inspectors, mortgage specialists, mortgage brokers, real estate agents, real estate salespersons, lawyers, or appraisers (although some may hypothesize).
- Insurability may also be determined, or at least influenced, by government. Contact the Service NL department of the Government of Newfoundland and Labrador for more information.
- Consumers can shop around for insurance.
Insurability and Mortgages
Insurability can stop real estate transactions. This is because insurance is required by banks in order to finance a purchase and will be sure to verify it is in place by instructing the lawyer handling the transaction, for example:
Obtain evidence of insurance. For all insurance policies ensure that the policy contains the Insurance Bureau of Canada standard mortgage clause with the Mortgagee being first loss payee. -Source: GENERAL INSTRUCTIONS TO LAWYER/NOTARY, Royal Bank of Canada
Especially for this reason, is is recommended that potential buyers
- get a qualified home inspection performed as soon as possible after an offer is accepted, and
- shop for a homeowners insurance policy (the report will include much information requested by insurance companies).
Furthermore, in addition to making an offer conditional on a satisfactory home inspection, adding a condition of the property's insurability should be discussed with your real estate lawyer and sales professional. Make sure you fully understand the ramifications of excluding this clause in your Agreement of Purchase and Sale.
Insurability and Home Inspections
As discussed previously under the heading, Insurability Is Determined by Insurance Companies, insurance underwriter and broker risk assignments are proprietary information, also known as a trade secret, and their decision making process may change without notice. The Insurance Bureau of Canada (IBC) may publish recommendations for standardized criteria to member companies, but these are only recommendations only. Since home inspectors are not privy to this information, and it is constantly changing, it is not possible for home inspectors to report on insurability.
Home inspection reports do, however, contain information that is often requested by insurance companies, and is useful for the purpose of shopping for insurance. Sometimes an inspector will add a note to a description of a building element, or to an explanation of a deficiency, indicating that the item being reported should be further investigated with insurance companies. These notes are neither an exhaustive list of all insurability risks, nor a guarantee of insurability, and are only representative of the limited experience an inspector may have with a particular issue.
What Conditions Are Frequently Raised By Insurance Companies?
Caution: This is not an exhaustive list. Please see the previous section, Insurability and Home Inspections.
Note: The items included on this are not necessarily risks. For example, a small building with oil heat may not require an electrical service greater than 60A, and a pool may only require additional checks like confirming the presence of a gate.
Electrical (Added: 2016-11-20)
- 60 amp Electrical Service - may require upgrade
- Aluminum Wiring - may require further inspection by an electrician
- Knob and Tube ("Open") Wiring - may require replacement
Solid Fuel and Gas Burning Appliances and Equipment (Added: 2017-03-02)
- Fireplaces and Stoves - may require additional measurements and facts reported
- Heating Oil Storage Tanks - this varies significantly, but generally requires a tank compliant with the most recent regulations
- Oil Heat Furnaces - may require age of furnace (20 years is a common cut-off)
Potentially Hazardous Materials (Added 2017-03-02)
- Asbestos - not common, but it may arise with construction related insurances
- Mould - may require reporting the presence of organic growths
- Urea Formaldehyde Foam Insulation (UFFI) - may request removal
- Lead - no known issues, but included for discussion
Health and Safety Risks
- Pools - may require a check that safety features are present
- Smoke Detectors - may obtain better rates by installing more detectors
- Distant Fire Hydrants or Stations - may result in a higher rate due to a remote location
Deteriorated and Susceptible Building Materials
- Cast Iron Pipes - may require removal
- Copper Pipes - may request age of pipes (this is impossible to provide without owners documentation)
- Galvanized Pipes - may require removal
- Plastic Pipes - may require removal (some brands are susceptable to premature failure)
- Roof Membranes - may require installation date (this is impossible to provide without owners documentation, however inspectors do inspect and report the condition of roofs)
- Wood and Rock Masonry Foundations - may require additional inspection by a structural engineer
Other Insurance Concerns
- Flood Plains - may refuse to insure
- Sump Pump - may raise rates
- Trees - may require pruning or removal
Consumer Options In Response to Insurance Issues
There are many ways to deal with these issues other than spending big money to make upgrades or alternations, or deciding to walk away from an offer. For example, an insurance company may be satisfied with an electrician conducting a detailed examination aluminum wiring and providing a compliance letter. A consumer may also choose to continue shopping for insurance elsewhere. It may also be acceptable to the insurance company to render a system non-functional, such as closing in a wood fireplace that was found to be unsafe when inspected.
The next few Home Remedy Blog entries will explore each of the conditions listed above, starting with 60 amp Electrical Service. Sign up for an account and subscribe to this article to receive updates (registered users: see the link below, "Click to watch this page and be emailed about updates.").
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