What is an Insurance Subject

When Realtors write an offer on a home we place subjects in the contract to protect the buyer. One of these subjects is an insurance subject.

Even though I always explain the subjects and how they protect the buyer, the other day one of my clients really questioned as to why he needed this subject in his offer to purchase a home. Now perhaps other areas of the country do not use this clause, but here in Prince George it is a standard subject that Realtors place within the Contract of Purchase and Sale.

The subject states:
"This offer is subject to the Buyer(s) obtaining approval for fire/property insurance, satisfactory to the Buyer(s) on the above mentioned property on or before [insert date].
This subject is for the sole benefit of the Buyer."

This does not mean that the buyer must get insurance before the home is actually purchased. What it means is that the buyer needs to find out by the specified date whether an insurance company will actually insure the home or not.

The buyer brings the listing sheet to an insurance agent, informs them that he is trying to purchase the home and asks if they would insure the home. If so, then the insurance agent can provide a letter stating that they are willing to insure the home as long as all the information provided about the property is accurate. Often the insurance agent will ask for additional information or photos of the home.

Where I live there are certain things that insurance companies will look closely at, such as preserved wood foundations, wood fireplace inserts, age of roof, aluminum wiring, galvanized plumbing, amperage of electrical service etc. Some items make the home uninsurable such as the electrical amperage being under 100amps (although these items may vary between the various insurance underwriters). Sometimes the buyer himself will be a high insurance risk or uninsurable.

If the buyer comes across something that would deem the house uninsurable, then his Realtor can try to renegotiate the offer by either asking the seller to correct the problem, or to reduce the price so that the buyer can correct the problem immediately following the closing of the sale (of course arrangements/permission must be obtained from the insurance company first).

Most importantly this subject protects the buyer in regard to the mortgage. If he is unable to get insurance on the home, then he will not qualify for the mortgage.

Disclaimer: This information may vary depending on insurance underwriters and financial institutions. As such, it is possible that certain inaccuracies or inconstencies may occur.