Property Insurance Claims and Their Effect on Mortgage Approval

Insurance claims history is a factor that most LOs never consider until it surfaces during underwriting. A property with multiple prior claims may be uninsurable at standard rates, which can kill a deal that otherwise clears credit and income.

How Claim History Affects Insurability

Insurance companies access the Comprehensive Loss Underwriting Exchange (CLUE) database, which records up to seven years of property insurance claims. A property with multiple water damage, mold, or fire claims may be declined by standard insurers and can only obtain coverage through state-run FAIR Plans (last-resort insurers) or specialty surplus lines carriers. FAIR Plan and surplus lines coverage is typically more expensive and may carry exclusions that do not meet lender requirements.

Lender Requirements for Hazard Insurance

• ✦Coverage must be at least equal to the lesser of the replacement cost value or the loan amount
• ✦The lender must be named as mortgagee on the policy with a 30-day cancellation notice requirement
• ✦Deductibles above 5% of the insured value may require lender approval or escrow of additional funds
• ✦FAIR Plan policies are acceptable to most lenders but must cover the same perils as standard HO-3 policies
• ✦Surplus lines coverage requires confirmation that the policy meets state minimum standards; some investors restrict surplus lines to specific scenarios

What to Do When Insurance Is Problematic

If the CLUE report shows prior claims, request an explanation from the seller and confirm what remediation was completed. A properly remediated claim with documentation is different from an unresolved condition. For coastal properties, wind and flood coverage may need to be sourced separately from the hazard policy. Get the insurance binder early in the transaction; discovering an insurability problem in the week before closing creates serious timing risk for all parties.