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New warning for buyers: Get a CLUE

Buying a home without getting a CLUE can land you in deep trouble.

CLUE is the Comprehensive Loss Underwriting Exchange, which tracks insurance-claim histories of both people and properties, and it can be a major roadblock on the highway to homeownership.

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Home buyers who have never made a claim on their own policies are finding themselves being rejected for insurance coverage on the house they've just bought, because the house itself has a poor CLUE record.

If you can't get insurance coverage, you can't get a mortgage. Worse, if you pay cash for a house and then get turned down for coverage, you can find yourself between a rock and a hard place -- either paying excessive premiums to get your property protected or "going bare" with no insurance protection against a variety of perils.

"Buyers assume that because they have a good insurance history that getting a policy on their new home will be routine," says John Dixon, a Chicago real estate lawyer..

"You might find, after closing, you can't get a policy, and you're in breach of your mortgage, which requires you to keep the property -- the lender's collateral, after all -- protected.

Even more shocking, adds Dixon, is the possibility of closing the deal on your new home -- with an insurance certificate issued -- and then have insurance denied after you close.

"The CLUE report is not available to the insurer until after closing," he explains, "so they typically put a caveat in the policy language allowing them to refuse coverage should adverse information about the property be discovered after the insurance certificate is issued."

If your own insurer refuses to cover you, then you have to scramble to find someone who will -- usually at a hefty price.

Insurance woes mount
"Mold is the big issue at present," explained Stephanie Vitacco, a top real estate agent for Coldwell Banker in Los Angeles' San Fernando Valley. "People have brought so many lawsuits about mold in their homes causing health problems that some of our biggest insurers have stopped issuing new homeowners' policies. It's like asbestos was a few years ago, a fruitful area for lawsuits and attorneys."

Under CLUE guidelines, any homeowners' insurance claim is logged and kept on the database for five years. More than 600 insurers, or nine of every 10 in the industry, provide and share the data.

They report on claims for about 30 kinds of losses, from wind damage to dog bites. A cyber visit to Choicetrust.com will get you a report on every claim against the property filed in the past five years for $12.95.

Insurers obtain a CLUE report before issuing a policy. This usually doesn't happen until near the end of an escrow, which can produce serious problems for a buyer if a prior claim is found. The insurer might not be willing to issue coverage. Or, the premium might go up - dramatically.

"So now you have a buyer who is expecting to have $X as an annual insurance cost, versus $X times three," Vitacco says. "Maybe they would not have purchased the house knowing that it was 'insurance challenged.'"

What's more, a seller could be unaware of prior claims if the claims were made before he bought the house.

"I have heard horror stories, especially in a fast-moving real estate market, where a seller has not lived in the home for more than a year or two," says Vitacco.

In one case, the seller had been in the house for just nine months when she put it on the market, not knowing that four years previously, her home had been flooded.

Attorney Doris Calandra found out the hard way, too. She filed a mandatory damage report on her California home with her insurance company. Even though she didn't file a claim, the insurance company dumped her.

"Our house has the red cross of the Black Death on the door," she testified in a state Senate hearing for insurance reform. "If we wanted to sell, we could not. No buyer would get insurance until time wipes the CLUE record clean."

That's because water damage is a red flag to insurance companies, Dixon says.

"The insurance companies have been getting so many water damage and mold claims that it became unprofitable for them, so they have modified their policy language to exclude damage related to water," he says.

Dixon says it's another reason for buyers to research thoroughly and get their purchase contracts written properly. He strongly urges buyers to make sure their agents or attorneys insert a clause in the contract giving them the right to receive and review the CLUE report before closing the deal.

It's the real estate agent's and the lawyer's job to find out what has happened to the property, Dixon says. "We check for everything from radon to asbestos. Mold and water damage are just extras on that list. Maybe the basement floods all the time; maybe there's a leaky roof."

Vitacco agrees. "We use a form as part of the contract requiring the seller to disclose all insurance claims made on the property in the past five years. That flushes it out at the beginning."

A similar technique is to require in the contract that the owner provide a CLUE report well ahead of closing.

"People need to understand who their insurance agent works for," adds Dixon. "Making lots of minor or frivolous claims can affect your standing, and maybe take away your insurance or your ability to sell your home easily."

Paul Bannister is a freelance writer based in Oregon.

-- Posted: May 16, 2005

'05 Real Estate Guide
30 yr fixed mtg 3.83%
15 yr fixed mtg 2.94%
5/1 jumbo ARM 3.33%
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