Insurance, Hurricanes, & Home Sales

September Cover

It’s finally September!  Kids are back in school.  Hopefully the weather will cool off soon.  It sure has been a hot and humid summer.   With Hurricane Danny, the first major hurricane of the season, and Tropical Storm Erika behind us now, I will discuss how hurricanes can affect real estate transactions.

First, once a named tropical storm enters a predetermined geographic boundary around Florida we call the “box”, home insurance companies will suspend the writing of new policies.  This makes perfect sense of course.  They are not in the business to underwrite new policies or increase coverage right as a hurricane is “at the door”.   The effect of this suspension is that without insurance coverage, the mortgage company will not issue the loan.  So during active storm season, it’s important for a buyer to secure home insurance early during the transaction, so there is no delay of closing.  The FR/BAR-3 Residential Contract for Sale and Purchase has an automatic 3-day closing extension under such circumstance of insurance suspension or disruption of utilities.  After up to 14 days, the contract may be terminated.

Generally speaking, the suspension of new insurance policies is temporary and coverage is resumed as soon as the storm passes.  The situation that no one wants to see, of course, is a storm causing actual damages to the home while it’s under contract for sale and purchase.

Regardless of what stage the sale and purchase contract is in, the Seller has a contractual obligation to maintain the home in the same condition as it was when the contract was signed.  Therefore, any storm damage is the Seller’s responsibility.  The “Risk of Loss” clause provides for the solution in such situation.

Memories of the 3 hurricanes that hit central Florida in 2004 are still vivid in some of our minds. The Risk of Loss clause provides for the termination of the contract if the cost of restoration exceeds 1.5% of contract purchase price. So if a contract is for the purchase of a home at $300,000, the 1.5% threshold is merely $4500 worth of damage. Other than termination, everyone gets very busy with insurance, estimation of repairs, actual repairs, and escrow arrangements in the event the repairs cannot be completed. It’s a complicated mess that I certainly hope we will not see again anytime soon.

Enjoy the upcoming fall season, stay safe.  If you have any questions about buying or selling a home, give us a call.  We love talking real estate.

Until next month, take care!