A cell phone buzzes, and one leaves the room to take a call. Moments later he returns with a pained look and the news that a big-ticket residential transaction his firm was handling had crashed because the buyers could not obtain homeowners insurance.
The group’s discussion of standards quickly dissolves as each broker shares his or her own war story about the growing nationwide homeowner insurance crisis.
However, incredibly, what wasn’t heard in this entire exchange of horror stories was what any of their firms were doing to initiate risk management procedures that addressed this growing problem.
Home insurance getting expensive
Over the past 18 months the real estate industry has been watching, and discussing, the rapidly increasing cost of homeowners insurance (up 17 percent in two years) and the problems caused when buyers cannot get it. The problem is made even more acute and emotional when it pops up just before closing.
A significant part of this problem comes from the fact that, while brokerage firms are still trying to decide whether to practice risk management, the insurance industry is well into it.
Insuring the operation of motor vehicles and the ownership of dwellings has always been risky. The sometimes “situational ethics” of the American consumer have often looked the other way when insignificant (or blatantly bogus) claims where filed by friends and family.
For many years in our society it’s been considered a bit of a sport to “get one over” on the insurance company because there was no real victim – and the insurance company has plenty of money. Of course, there was a victim -- the insurance carriers’ profits. And they have responded with a vengeance.
Insurers have a CLUE
For the past few years that industry has been aggressively reducing the risk created by these claims by building and maintaining a nationwide computer database they call CLUE (Comprehensive Loss Underwriting Exchange). Through this system, participants at all levels of the industry input a wide variety of consumer interactions ranging from innocent inquiries to major claims.
Today more than 90 percent of insurers use CLUE’s database of 170 million auto loss claims and 40 million homeowner loss claims.
From this aggregated record, the insurers make decisions regarding the insurability of both individuals and specific properties. Individuals who communicate or file claims with their agent, and properties with homeowner insurance claims become “stigmatized.”
Stigmatization can, and increasingly does, result in the denial of insurance. Insurers say the statistics seem to suggest that folks who sin are likely to do so again and thus are not good risks.
The way CLUE data can become part of a real estate transaction is very specific. An authorized individual must order a CLUE report on the property and place it in the record. Insurers can access the reports easily.
But, like credit reports, only those listed on the reports can order CLUE reports from either of the two firms that provide them, either by telephone or on-line.
A homebuyer or his agent cannot access CLUE information on a potential purchase. And, that’s where the closing table problems start.
Some call it blacklisting!
The statistics are interesting. Sixty-seven percent of homeowners have no claims on their CLUE reports. The remaining 33 percent are facing the realities of a system that some suggest is tantamount to blacklisting. The insurers say they are merely protecting themselves against bogus and illegitimate claims, thus driving up the cost of insurance.
However, the CLUE system’s fairness or appropriateness is not the point of this column. The fact is the system exists. And, judging from the lack of judicial interpretation to the contrary, it appears to be perfectly legal.
The challenge for the real estate industry is to stop wasting time discussing whether it’s fair or not, and begin to do what it can to ensure that brokerages do not become accidental victims.
The risk to the brokerage is crystal clear. A negative CLUE report delivered at closing can derail the deal. No deal means no commission. Worse yet, this creates the specter of potential errors and omissions claims against listing brokers for trying to sell “uninsurable properties.” Of equal risk is the threat of lost transactions, tarnished reputations and damaged working relationships.
Some Steps to Take
The solutions are simple in practice but potentially complex given the relationships involved.
• The first step is to adopt a company-wide policy that CLUE reports be made part of the transactional record as soon as possible. Buyer’s agents must make this recommendation at the first opportunity and must do so every time.
• A negative CLUE report should be made part of the negotiations early on, and not the cause for “closing table trauma.”
A more subtle question is whether or not the brokerage should make CLUE reports part of their listing process so the information can be made available to both the listing firm and potential buyers. This may well become an industry standard in the future. But for the time being, the only person who can order the report is the homeowner.
• The brokerage risk management program must include a full explanation of the CLUE system and the need to secure homeowners insurance early on in the process. Compliance with this requirement should be acknowledged in writing by the buyer.
• Specific procedures should be incorporated into the firm’s risk management program, which in turn should include documentation, monitoring and corrective action components. Taking positive steps to avoid the pitfalls of the CLUE system cannot be left to the agent’s discretion.
• Avoid at all cost the legal jeopardy of the seemingly casual but almost universally transparent practice of requiring CLUE reports only when “those types of people” are involved.
Finally, be sure to add this service to the master brokerage services list for marketing and quality improvement. Avoiding or at least detecting insurability problems early in the process should become yet another of the 234 ways in which using a Realtor® can prevent a disaster down the road.
