Can You Sell Your Home With An Open Insurance Claim?

They can pay out of pocket to replace or repair all damaged portions of the property prior to the sale, demand top-dollar for the value of the property, and, as part of the transaction, retain all rights to their claim. The amount spent making repairs becomes the new damage amount that forms the basis of the claim.

They can sell the property in as-is condition (with the damage resulting from the claim unrepaired) at a reduced sale price and retain the rights to their claim. The amount credited to the buyer in the transaction becomes the new damage amount that forms the basis of the claim.

They can sell the property in as-is condition (with the damage resulting from the claim unrepaired) and assign the claim rights to the buyer. In exchange, the buyer would agree to pay the value of the property once it is repaired (over the actual current value of the property due to its current condition) based on the expectation of receiving the rights to collect the insurance benefits for the difference.

In any scenario, it is crucial for the seller to keep the best and most accurate records possible (such as photos, repair estimates/invoices, proof of payment, etc.) and to be honest and transparent with all parties involved in the sale to avoid litigation for failure to disclose required information to the other party. Failure to disclose all legally required information can expose the seller to a lawsuit—or even prosecution—depending on the circumstances.

While selling a home with damages or a pending insurance claim is not uncommon, it is advisable for sellers to consult an attorney to help them decide on the best course of action and ensure their interests are protected.

Accordingly, sellers should keep these tips in mind:

  • Do not fail to disclose damages or pending insurance claims to prospective buyers. Attempting to hide property damage or known problems from prospective buyers can result in future civil and/or criminal penalties. Sellers can protect themselves by letting the realtors or attorneys assisting them with the transaction know that there is an open insurance claim on the property, or being candid about any unrepaired damage. The realtor or attorney will provide the seller with a seller’s disclosure form that informs the buyer about these matters, safeguarding the seller from future allegations of deception or failing to close the condition of the property.

  • Consider assigning the insurance claim proceeds to the buyer. If, after disclosing an open claim or unrepaired damages, a prospective buyer still wants to purchase the property, the seller can, at the seller’s discretion and in agreement with the buyer, assign (or transfer) the benefits of the claim to the buyer, who will then be entitled to receive the proceeds from the insurance. But be cautious, sellers who opt for this option should have an attorney draft or review the assignment of benefits and real estate transaction documents. If the agreement to transfer the interest is vague or not properly worded, the buyer may be unable to receive the insurance proceeds and may seek legal action against the seller.

  • Retain the right to insurance proceeds and reduce the sale price of the property. If the buyer does not want the benefits of the claim assigned to them, or the seller wants to keep the right to the benefits, this could be the best option the seller’s realtor should make sure that sales documents clearly state the amount by which the price is being reduced, and specify that the reduction is due to the condition of the property or an open property insurance claim. A close look at comparable sales prices of similar properties in the area can be a good starting point to determine the fair market value of the home.

  • Know the repair cost for the damages and the effect on the property’s value. It will be difficult for a seller to determine whether to keep or assign benefits of a pending claim without knowing the cost of repairs and the property’s value; an experienced contractor or appraiser can help. The contractor or appraiser will evaluate the damage, estimate the cost of repairs, and provide insight as to the value of the property. Armed with this information, the seller can then decide which option is in their best interests and be more informed in negotiations with the buyer.

  • Prepare and maintain documents to substantiate the claim. Insurance companies do not always agree with a seller’s loss estimates or account of what caused the property damage. That is why it is important for sellers to keep good records concerning the date and time damage occurred, photographs of the damage, and estimates for repair and valuation of the claim. If the seller opts to retain the rights to the insurance proceeds, keeping these documents is crucial because once the property is sold the seller may not have the opportunity to return to the property. If the seller assigns the insurance proceeds rights to the buyer, the buyer will need this information to dispute the insurance company’s assertions. It is extremely important that the seller maintain as much information surrounding the property damage, the open insurance claim, any repairs performed, and photographs of the damage or repairs performed. Once the property is sold, it will be extremely difficult (if not impossible) to compile this information if requested by the insurance company. The seller should also consult his/her attorney or public adjuster before performing any repairs because the insurance company may need to send experts to the property to perform inspections and evaluations prior to changing the condition of the property.