Past owner's claims haunt home buyers

Just picture it: You're days away from closing on a new home, you've secured your financing, packed up your belongings, and now all that's left is a phone call to your insurance agent to take out a home insurance policy. Then the nightmare begins.
You find out your dream home is uninsurable because there is a history of insurance claims by the previous owner.
Despite home inspections and real estate disclosures required by law, the unthinkable does happen. Texas real estate broker Karen Wilson says it happens all too often in her state, where the home insurance market has been in shambles ever since several major insurers stopped selling new policies. Insurers claim they have suffered heavy financial losses as the result of a sharp increase in mold and water-related claims.
"It's a crisis for both buyers and sellers," says Wilson. "There are properties with a past history of claims that are virtually uninsurable." The really scary part, she says, is the buyers are often the last to know.

Past claims can haunt you
How do previous claims on a house you don't yet own wind up haunting you? A typical example goes like this: The homeowner discovers a leaky bathroom faucet and calls his insurance agent to discuss whether he should file a claim on his home insurance policy. Since the policy has a $500 deductible, he decides to repair it himself and skips filing a claim.
During the sale of the house, the homeowner discloses to you a previous claim for a burst water pipe in his basement for which his insurer paid, but he doesn't bother to mention the leaky faucet. After all, it is repaired and he spent his own money to fix it. When you go to purchase a policy for this home, you're denied based on the fact the home has had two claims in the past three years: the burst pipe and the leaky faucet.
What has happened, according to Wilson, is the homeowner's insurer opened a claim file on the leaky faucet as soon as he called and then later marked it "closed, with no payment" when the homeowner decided to fix the leak himself. Insurers say it is standard procedure to record such telephone inquiries in this manner.
Who has a CLUE?
While you might not have a clue about a home's past insurance claims, your insurer certainly does. Ninety percent of home insurers subscribe to CLUE, which stands for Comprehensive Loss Underwriting Exchange. CLUE is a database of homeowners insurance claim histories. When you apply for home insurance, your insurer will request a CLUE report to determine whether you, the buyer, or the seller have filed any claims during the past five years. The CLUE database also includes damage reports that were later closed when the owner made the repairs himself.

You can get a free copy of your CLUE report if you are denied insurance due to information contained in it. Additionally, if you have a dispute with an insurer about the information in the report, you can ask that your account of the events be included in the report. If you are simply curious about your home's history, you can order a copy from Choice Point, the company that owns the CLUE database.

Unfortunately, you can't order a CLUE report if you are not the homeowner. Prospective buyers aren't allowed to request a CLUE report for a home they want to purchase. "There's nothing stopping you from asking the homeowner to provide you with a copy as a condition of the sale," says Wilson. She believes such requests will become commonplace.

CLUE reports are not just about "buyer beware," says Choice Point Vice President Richard Collier. Buyers can also learn about positive attributes of their potential new home. "If you're buying an older home and the roof was replaced because of storm damage, you may be very happy knowing you are getting a newer roof," he says.
Home insurers have relied on information from CLUE's property and casualty database (there is also one for auto claims) since its launch in 1992. Originally, insurers used it as a background check on applicants to ferret out a pattern of fraudulent claims, says Jeanne Salvatore, vice president of consumer affairs at the Insurance Information Institute. "What's new is that insurers are now taking a look at individual structures to see if there have been a lot of claims made on the property itself."
Not only does CLUE alert insurers to properties that carry potentially more risk than they are willing to assume, but it also gives consumers another tool to make good purchasing decisions. "By having a home's claims history, the buyers have the information they need to confirm if all the necessary repairs were done properly," says Salvatore. "If a burglar robbed the home in the past, the buyers can find out if the house is now secure. Do the alarms work? Have new locks been installed? If the answer is no, the buyer can rethink the purchase, or negotiate a lower price."

The use of CLUE by insurers shouldn't be construed as negative, says Collier. "People fall in love with certain houses and they're upset when they can't get them insured. But it's better to find out before they sign the dotted line that there are problems rather than to wind up with a nightmare later on."

Make sure you can insure your home
It pays to educate yourself about home insurance when you're seeking affordable coverage. Here are some ways you can help yourself:

. Find out the rules regarding home insurance renewals in your state. Some states exercise control over when an insurer can refuse to renew your policy. In Texas, for example, an insurer can't refuse to renew your home insurance policy unless you've made three non-weather related claims within the past three years.

. Consider paying for small losses out of your own pocket. Insurers take notice of customers who submit too many small claims. If someone breaks into your house and steals your new stereo, it might be better to go out and buy a new one at your own expense, particularly if you've had a claim or two within the past three years.

. Think twice before you call your agent or insurance company. If you are considering filing a claim but aren't sure, wait to make that call. The minute your insurer's customer service representative logs your call, the insurer has opened up a file on you that will be tracked through its computer system.

. Shop around for coverage. If your insurer denies you a policy based on previous claims or the rates are simply unaffordable, don't get discouraged. You should obtain quotes from at least three other insurers so you can compare premiums and coverage options. If you cannot get a home insurance policy, check if your state offers Fair Access to Insurance Requirements (FAIR) Plans. FAIR plans were created in the late 1960s to make property insurance more readily available to people who can't obtain it from private insurers because their property is considered "high risk."

. Raise your deductible and consolidate insurers. In order to save 10 to 20 percent on your home insurance premium, consider raising your deductible if you can afford it. Also, some companies will give you a discount if you insure both your car and home with them.

. Check your credit record. In addition to your past claims history, some states allow insurers to use your credit score to help them decide whether to issue you a policy.

You should order a copy of your credit record periodically to ensure it doesn't contain mistakes that could prevent you from obtaining a home insurance policy or lead to higher premiums.