Randy Gilbert, J.D.
Chief Happiness Officer
Florida’s Title Insurance Company
(954) 500-Title (8485)
We know major storms come, so how should realtors and practitioners in disaster prone areas prepare to minimize disruptions in their transactions? According to the National Hurricane Center, Florida’s hurricane season runs from June 1st to November 30th. Facebook also likes to remind me with pop-ups, that for the past 3 years during the exact same week, my family and I have had to prepare for a major storm. Suffice it to say, hurricanes are here to stay.
Property Insurance considerations. As a precondition to loaning money to buy property lenders generally require borrowers to purchase a property insurance policy with 100% Replacement Cost Value (RCV). Watch out because insurers are supposed to offer RCV policies with a “Law and Ordinance” endorsement which: (1) do not include costs necessary to meet applicable laws and ordinances regulating the construction, use, or repair of any property or requiring the tearing down of any property, including the costs of removing debris in the aftermath of a loss; and (2) does include such costs. However, if the insurer does not obtain the policyholder’s written rejection of both coverage options (1) and (2), “any policy covering the dwelling is deemed to include the law and ordinance coverage limited to 25 percent of the dwelling limit.” See, Fla. Stat. §627.7011(1)(a)-(b).
Claims for: Hurricane Michael (10/2018) averaged $57,754, Hurricane Florence (09/2018) $47,138, and Hurricane Harvey (08/2017) $116,823. Hurricane deductibles can be 2%, 5% or 10% of an insurance policy. See, Fla. Stat. §627.701(3)(a). Look for an insurance company that gives an accurate RCV, without over-insuring the property. It’s counterintuitive but, more insurance could mean less coverage for repairs. Consider this scenario, a property costs $1M to purchase, but the insurance agent offers coverage at $1.5M with a 2% deductible. The agent then explains that it will cost more to rebuild (regardless of your purchase price) and that is why the estimate is for $1.5M. First, when buying property, your purchase price included the land and maybe a pool – which generally isn’t going anywhere absent complete Armageddon. So when your agent calculates an RCV, speak to them about how they came up with their RCV estimation. Second think about if you had $60K in damages, the deductible on a $1M Property with a 2% deductible would only be $20K; but if the property were over-insured at $1.5M that deductible would kick up to $30K before any insurance dollars were paid out, meaning less money for the insured. So more insurance can be counter-productive.
Flood Insurance considerations. Flood Insurance is separate from property insurance, even if hurricane winds and rain caused the flood to occur. The term “flood” includes, “The unusual and rapid accumulation or runoff of surface waters from any source.” Properties in high-risk flood areas with mortgages from federally regulated or insured lenders must have flood insurance (and there is no 30 day waiting period). In moderate/low risk flood areas, lenders may require flood insurance. But if there is no lender at all (e.g. cash buyer) or the lender is a Non-FDIC insured lender (e.g. private) and flood insurance is requested, then prepare to wait because there is a 30 day waiting periodimposed by the NFIP (National Flood Insurance Program). As a work around, a buyer can purchase private flood insurance company (i.e. not NFIP backed) or have the seller transfer their existing flood insurance to the buyer. If you don’t have coverage and a storm hits, you may not get federal assistance through FEMA unless the event is declared a federal emergency and even then, post-disaster grants averaged less than $10,000.
Be diligent, when a storm is imminent insurers impose a binding moratorium and will not write new insurance policies, making it impossible to get a loan. Therefore, during storm season it is advisable to have the insurance agent “bind” coverage as soon as possible but postpone the effective date the insurance policy goes into effect until the closing date.
Lender/Mortgage Considerations. Lenders and insurers may elect to re-inspect or re-appraise property for storm damage and can charge their borrowers to re-value the property (i.e. the collateral), and cause delays. Further, if the new cost is bundled into the loan (as opposed to being paid outside of closing), then the Loan Estimate would need to change triggering a new 3 day waiting period under TRID. Moreover, interest rate locks may expire during a storm and cost more money to extend. Admirably, we know some awesome mortgage brokers (shout out to Lane Barron and Danny Tokar) have chosen to eat these cost for their borrowers.
As-IS Contractual Considerations. While the “As-Is Residential Contract For Sale And Purchase” may have a time-is-of-the-essence clause it specifically addresses casualties, losses, and force majeures in varying ways.
In the event of a disruption due to a force majeure, Section 18G allows for all time periods (not just the closing date) to be “extended a reasonable time up to 7 days after the Force Majeure no longer prevents performance under this Contract.” It may surprise you to learn that the term “force majeure” broadly includes any extreme weather, act of God, or unusual transportation delays which, by exercise of reasonable diligent effort, the non-performing party is unable in whole or in part to prevent or overcome. Could a force majeure include an intervening cancelled flight, a death, fed-ex’s failure to transport required documents? If a delay due to a force majeure arises anytime during the course of a contract (not just on the deadline) the parties should promptly provide the other party with a description of the delay, what was done to lessen the delay, the time adjustments needed. But extensions are not indefinite. Force Majeures that push the closing date more than 30 days allow either party to cancel the Contract without penalty.
“18.G. FORCE MAJEURE: Buyer or Seller shall not be required to perform any obligation under this Contract or be liable to each other for damages so long as performance or non-performance of the obligation, or the availability of services, insurance or required approvals essential to Closing, is disrupted, delayed, caused or prevented by Force Majeure. “Force Majeure” means: hurricanes, floods, extreme weather, earthquakes, fire, or other acts of God, unusual transportation delays, or wars, insurrections, or acts of terrorism, which, by exercise of reasonable diligent effort, the non-performing party is unable in whole or in part to prevent or overcome. All time periods, including Closing Date, will be extended a reasonable time up to 7 days after the Force Majeure no longer prevents performance under this Contract, provided, however, if such Force Majeure continues to prevent performance under this Contract more than 30 days beyond Closing Date, then either party may terminate this Contract by delivering written notice to the other and the Deposit shall be refunded to Buyer, thereby releasing Buyer and Seller from all further obligations under this Contract.”
Typically a due diligence period is around 7 to 15 days; however, Section 10G of the As-IS addresses Flood Insurance by providing 20 days (unless changed) to cancel the contract if the buyer discovers that for insurance purposes the property is “below minimum flood elevation or is ineligible for flood insurance coverage.”
“(d) FLOOD ZONE; ELEVATION CERTIFICATION: Buyer is advised to verify by elevation certificate which flood zone the Property is in, whether flood insurance is required by Buyer’s lender, and what restrictions apply to improving the Property and rebuilding in the event of casualty. If Property is in a “Special Flood Hazard Area” or “Coastal Barrier Resources Act” designated area or otherwise protected area identified by the U.S. Fish and Wildlife Service under the Coastal Barrier Resources Act and the lowest floor elevation for the building(s) and/or flood insurance rating purposes is below minimum flood elevation or is ineligible for flood insurance coverage through the National Flood Insurance Program or private flood insurance as defined in 42 U.S.C. §4012a, Buyer may terminate this Contract by delivering written notice to Seller within _____ (if left blank, then 20) days after Effective Date, and Buyer shall be refunded the Deposit thereby releasing Buyer and Seller from all further obligations under this Contract, failing which Buyer accepts existing elevation of buildings and flood zone designation of Property. The National Flood Insurance Program may assess additional fees or adjust premiums for pre-Flood Insurance Rate Map (pre-FIRM) non-primary structures (residential structures in which the insured or spouse does not reside for at least 50% of the year) and an elevation certificate may be required for actuarial rating.”
Maintaining the property and Casualties are addressed in Section 11 and Section 18M of the As-IS. Sellers are generally required to maintain the property, pool, and landscaping excepting ordinary wear and tear. But in the event of a “Casualty Loss” including from a severe storm or fire which occurs prior to closing, the Seller could be liable for repair costs up to 1.5% of the Purchase Price. If the costs exceed 1.5% then the Buyer can cancel without penalty or take the 1.5% and close as-is.
“11. PROPERTY MAINTENANCE: Except for ordinary wear and tear and Casualty Loss, Seller shall maintain the Property, including, but not limited to, lawn, shrubbery, and pool, in the condition existing as of Effective Date (“AS IS Maintenance Requirement”).”
“18.M. RISK OF LOSS: If, after Effective Date, but before Closing, Property is damaged by fire or other casualty (“Casualty Loss”) and cost of restoration (which shall include cost of pruning or removing damaged trees) does not exceed 1.5% of Purchase Price, cost of restoration shall be an obligation of Seller and Closing shall proceed pursuant to terms of this Contract. If restoration is not completed as of Closing, a sum equal to 125% of estimated cost to complete restoration (not to exceed 1.5% of Purchase Price) will be escrowed at Closing. If actual cost of restoration exceeds escrowed amount, Seller shall pay such actual costs (but, not in excess of 1.5% of Purchase Price). Any unused portion of escrowed amount shall be returned to Seller. If cost of restoration exceeds 1.5% of Purchase Price, Buyer shall elect to either take Property “as is” together with the 1.5%, or receive a refund of the Deposit thereby releasing Buyer and Seller from all further obligations under this Contract. Seller’s sole obligation with respect to tree damage by casualty or other natural occurrence shall be cost of pruning or removal.”
DISCLAIMER: Not intended to constitute legal advice, accuracy, nor completeness, and may not be relied upon as such; consult an attorney. FTIC is a national award winning title insurance company known for its white glove customer service and “No Junk Fee Guarantee.” ®