What Is an Insurance Contingency?

Homeowners insurance is a specific type of property insurance that covers damage to your home, its contents, and its inhabitants. Because all banks require some form of homeowner’s insurance before they will finance a mortgage, the vast majority of homeowners maintain a homeowners insurance policy although it is not legally necessary to have.

The exact amounts of coverage that is purchased will differ depending on location, as well as the cost of your home. However, the policies are always capped; meaning, they will not pay damages that exceed a certain amount, although the cap is adjustable by you, the consumer.

There are 8 standard homeowners insurance policies:

• HO-1: Basic insurance which covers the following 11 types of damage, to a limited amount: fire, lightning, windstorms, explosion, riot, theft, vandalism, smoke, and volcanic eruption. This policy generally forces you to name exactly what it is that you are covering, so this type is often used for specific objects as opposed to the entire house;
• HO-2: This policy adds six additional perils to the above mentioned: damage from falling objects, weight of snow and ice, freezing of plumbing and damage caused by faulty electrical, and heating systems. Similar to HO-1, HO-2 covers specific portions of a house, such as the roof;
• HO-3: This is the standard policy, and does not name perils that it protects against. Rather, this policy names “exclusions” of things that it will not protect against. It is designed to cover all aspects of the home, structure, and its contents. Coverage is extended to any liability that may arise from daily use, as well as any visitors who may encounter accident or injury on the premises, up to $100,000. Earthquakes, flood protection, war, and nuclear explosions are generally never covered;
• HO-4: This is renter’s insurance that does not actually protect the house, because you do not own the house, but protects you against claims that may be made while you live in the house;
• HO-5: Similar to HO-3, but covering greater liability coverage and broader protections;
• HO-6: For co-ops or condominiums, it covers personal property and provides liability coverage. Similar to a renter’s policy, it does not cover the structure, because the building will have its own policy;
• HO-7: Basic mobile home protection, generally without any liability coverage; and
• HO-8: “Older home” insurance, as it is designed for historical houses. This policy allows house owners with higher replacement cost than the market value to insure them at the lower market value rate.

What Are Contingencies In Real Estate?

Simply put, a contingency is a part of a contract which allows one party to walk away from the deal without penalty, if specific conditions are not met. A contingency clause is what defines the conditions and/or actions that must be met in order for a real estate purchase agreement to become legally binding. Because of this, if a contingency appears in a real estate purchase agreement or in the property’s listing, it generally denotes that there is an accepted offer on the property. However, there are other steps to be taken before the contract binds both parties involved.

Contingencies act as a sort of escape plan, as they allow either the buyer or seller to walk away from the deal if the specified contingencies are not met. An example of this would be if the buyer is having issues securing a mortgage for the property. The contract may then be broken with no penalties to either the buyer or the seller.

In the majority of real estate contracts, there is a period of time between signing the contract and actually closing the sale known as escrow. During escrow, most contingencies are expected to be fulfilled. If those contingencies are not met by the final closing date, either party has the right to cancel the purchase contract without facing any sort of penalty.

It is not uncommon for several different types of real estate contingencies to appear in the same purchase agreement. The most common examples include:

• Financing or Mortgage Approval: Real estate sales contracts are generally contingent upon the buyer securing financing, which could include a mortgage loan. The most common agreement would be agreeing to purchase the property, on the condition that you are able to obtain a mortgage loan of at least 75% of the purchase price;
• Inspector’s Report or Appraisal: Most real estate contracts specify that the buyer has the right to have a building inspector evaluate the property for any potential defects or zoning issues. In terms of a foreclosure sale, the deal could be contingent upon the buyer accepting the property as is.
  • Additionally, a real estate sale may be contingent upon an appraisal, which ensures that the property is worth the selling price. If the appraisal reveals a price lower than the selling price, there will usually be further negotiations in order to determine whether the seller will lower the price. Because of this, the real estate purchase agreement could be voided if the seller does not lower the price; and
• Renovation and Improvements: One party determines that the property can be renovated to their satisfaction. These contingencies are more common as commercial real estate contingencies than residential.

Some other examples of various real estate contingencies include:

• Insurance approval, which will be further discussed below;
• Closing date, generally utilized by the seller to ensure that they can back out of the purchase if the buyer cannot fund the deal by that date;
• Sale of previous property, which state that the purchase of a new home is contingent upon the closing on a sale of another; and/or
• Satisfactory walkthrough, requested by the buyer.

The law does allow either party to propose nearly any sort of contingency during the negotiations of a real estate purchase agreement. However, this does not mean that either party will actually accept the contingency.

What Is An Insurance Contingency?

An insurance contingency is the requirement that a home buyer apply for and obtain homeowner’s insurance prior to the sale being completed. This is generally added as a condition in the home sales transaction contract, and is generally fulfilled during the escrow process.

The party that is requesting the contingency may vary. It may be the seller who requests the contingency in the contract, while in other cases, it may be a mortgage lender who is requesting the buyer to submit to a contingency requirement. What this means is that they will not issue a mortgage loan unless the buyer first secures some type of homeowner’s insurance.

However, even in high risk areas, some homeowners have been denied insurance coverage because of the types of issues that would need coverage. This can affect the overall condition, value, and worth of the home in the long run. As such, it may be necessary to ensure that the owner of the home will have some form of insurance.

What Happens If An Insurance Contingency Is Not Met?

To reiterate, a contingency means that the contract is contingent upon the parties fulfilling the conditions and requirements in the terms. As such, if an insurance contingency is not met within the specified time period, it can have the effect of:

• Preventing the sale or transaction from being closed;
• Delaying the sales and closing process;
• Causing the breaching party to owe damages to the other party; and/or
• Requiring the home buyer to obtain forced-placed insurance.

Do I Need An Attorney For Insurance Contingency Matters?

If you are considering a contract which contains an insurance contingency, you should consult with an experienced and local real estate lawyer.

An attorney can provide you with relevant legal advice according to your state’s specific real estate laws, and can review any contingencies to ensure they are in your best interest.