BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
As previously reported, State Farm has announced that it will no longer be writing new homeowners’ insurance policies in the State of California. State Farm has indicated that it will not withdraw the existing policies. It is currently unclear whether State Farm intends to renew existing policies. It has further been reported that State Farm issues approximately 21% of the insurance for residential properties in the State of California. Therefore, this issue may have a significant impact on the real estate market.
NOTE: The following relates to C.A.R. purchase agreement forms where the obtaining of insurance is part of the buyer’s investigation contingency. In the PRDS and SFAR (Rev 7/23) purchase agreement forms the insurance contingency is separate from the investigation contingency.
As a reminder, the availability of insurance needs to be addressed by a buyer during the buyer’s investigation period. Insurance is not a separate contingency in the CAR purchase agreement forms. When the investigation contingency is removed, it is presumed that the buyer has investigated and received a commitment for insurance.
Recently, insurance has become more expensive to obtain, particularly in suburban or country areas. In several instances, buyers have removed their investigation contingency but subsequently learn that the cost of insurance is well beyond the amount they budgeted. In some of these instances, the cost of insurance drives buyer’s total monthly expenses over the lender’s underwriting guidelines. In these situations, buyers may no longer qualify for their loans given the increased cost of insurance.
A recent question arose as to whether a buyer can cancel the transaction and receive the return of the deposit when they have removed the buyer’s investigation contingency but has the loan contingency still in place, then loses their loan commitment because the buyer no longer financially qualifies for the loan due to the high cost of insurance payments. The answer is likely “no.” If the buyer has removed the investigation contingency but cannot obtain a loan due to the high cost or unavailability of insurance, the buyer cannot use the loan contingency to cancel the contract and obtain a return of their deposit.
This is similar to a situation where the buyer has a loan contingency, the appraisal contingency has been removed, and the only reason the loan is denied is because of a low appraisal. In that instance, under the CAR Purchase Agreement forms, the buyer cannot use the loan contingency to cancel the transaction.
It is also similar to a situation where a buyer loses their job after receiving a loan commitment and removing the loan contingency. In that instance, just because the buyer’s loan commitment has been withdrawn does not mean that the buyer can use the loan contingency, which has been waived, to cancel the transaction and receive the return of the deposit.
Until the tight insurance market in the State of California is resolved agents need to be aware of this issue and recommend that their clients investigate the availability and cost of insurance prior to removing their investigation contingency.
To address this situation, Broker Risk Management has created an Advisory for buyers to sign explaining the insurance situation in California and recommending that buyers investigate the issue before removing the investigation contingency. That Advisory is attached for our clients’ use.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
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