The adage, “Better safe, than sorry” should perhaps be the motto for the insurance industry. Although there are likely not going to be any ticker-tape parades celebrating insurance any time soon, anyone who has experienced a need to access insurance for anything recognizes the value of having the safety net it provides against significant loss. To be clear, I am not an insurance agent and won’t try and sell any policies in this article so instead let’s think about the places where sellers must be looking to insurance for safety in selling their home.
Significant Loss or Damage
While a homeowner is living in a property they will generally have homeowners insurance to cover against many perils that could happen in this crazy world and affect their use and enjoyment of the property. Such perils as floods, tornadoes, hail damage, ice dams, sewer backup, and any number of other things that you hope will never happen to you may be covered by a homeowners policy to protect against huge costs to remediate damage or loss. Essentially the role of insurance is to take the liability for a major and unforeseen cost off of the policyholder and move it to the larger financial backing of an insurance company for a more reasonable monthly or annual cost. In the standard AREA purchase contract, the seller agrees to be fully responsible for the risk of loss or damage to the property until the purchase price is paid. This means if they move out of the property a week before closing and cancel their homeowners' insurance in anticipation of the sale, they are absorbing all the potential risk of loss or damage on that property themselves. If the property were to catch fire in that timeframe and burn down, the seller would be responsible to make the buyer whole by rebuilding the home at their own cost. For this reason, the seller, in the AREA Exclusive Seller Representation Agreement, warrants that they will maintain insurance on the property and its contents against loss or damage, even if the property is vacant.
During the listing and marketing process, there are typically many people through the property relating to the transaction. The REALTOR® may conduct open houses on the property where curious parties and nosy neighbors want to have a peek, but the very nature of an open house is to invite unknown parties to see the property. REALTORS® make their best efforts to control traffic and supervise but there is always a risk of something going missing or being damaged by one of these visitors. Additionally, buyers come through properties by appointment with their REALTOR® which is much more controlled, but occasionally children come with the parents and scatter once inside the door. During the transaction itself, there are also possibly tradespeople, inspectors, appraisers, etc. who enter the home, always under supervision but no system is perfect. Although many of these situations may have specific protection through the insurance of the professionals entering the property, the specific coverage of the homeowner for their contents or damages protects them directly.
Tenanted properties are properties that require special insurance considerations. The contents of the property, except for appliances, are not the property of the landlord but rather the tenant. Tenants should maintain their own tenant insurance which would provide coverage to the tenant if anything should happen in or to the property during the listing period of the property. Additionally, the landlord should ensure the insurance company is aware the property is tenanted, and if the tenants leave at any point during the process, to update the insurance company about that development as well to be certain no gaps exist in the coverage they require.
Damaged but not destroyed In many parts of the province, severe thunderstorms are a reality that often carries high winds and can include extreme hail. In 2020, some neighborhoods in Calgary experienced a hailstorm resulting in $1.3 Billion in damage in only a matter of minutes. This is only one example of perils that can damage a property unexpectedly, but not to the point of destruction or replacement. If an event like this happens during a real estate transaction, there is a provision made in the standard AREA purchase contract to manage the situation by placing insurance proceeds in trust allowing the transaction to continue and securing the insurance remediation for the buyer required to make the property whole. Such a scenario should immediately prompt legal advice for both the seller and the buyer to determine the best way to keep things moving while the insurance company does what it was contracted to do, cover the liability.Although insurance isn’t the most exciting topic, it should be discussed at every listing consultation with a seller to ensure the seller understands their obligations and the risks associated with the property, and its marketing. As a former broker myself, I can attest that more than one phone call from a seller over the years started with “you will never believe what happened”. Things happen, and usually at the worst possible time, but when they do sellers can benefit greatly from the professional advice of REALTORS®, insurance brokers, lawyers, and other professionals when navigating insurance requirements, but bearing in mind that liability exists, and either the seller bears it, or they pass it to the insurance company.
Provincial Practice Advisor
Bryan has many years of experience in the real estate industry including over 10 years as a former broker in the Edmonton Region.
Email: email@example.comPhone: 403-209-3619