Recently there has been an uptick in calls to the WRA Legal Hotline about hail damage and the implications to real estate transactions. Some of these inquiries are straightforward, for example, when property damage happens between acceptance and closing. The more difficult questions arise when the damage was before the seller put the property on the market or the hail damage was discovered after closing. Some of these scenarios and hotline discussions are provided for review. 

Damage before the transaction 

A seller indicated in the seller’s Real Estate Condition Report (RECR) that there was hail damage to the roof months before the seller put the property on the market. Prior to the buyer drafting the offer, the cooperating agent received an email from the listing agent saying, “the roof is being replaced due to hail damage.” When the buyer drafted the offer, the buyer included, “roof to be replaced by seller prior to closing” in the additional provisions section of the offer. The seller accepted the offer with that language. What is the best way to proceed in this scenario?

Given the damage to the roof was discovered prior to the offer, the seller completed the RECR according to the seller’s knowledge of the property. The current RECR includes disclosure of defects regarding the condition of the roof and disclosure of whether the seller has filed insurance claims for damage during the seller’s ownership. When drafting an offer, it is appropriate to review the RECR to determine what, if any, defects are identified by the seller. It is also important to determine if the seller has disclosed any insurance claims on the property during their ownership. The buyer is then empowered to negotiate the offer requiring the seller to repair or replace the roof prior to closing, requesting copies of a CLUE report, or adjusting the purchase price according to the provided information. It is imperative for the buyer to consult with insurance providers to determine what, if any, limitations there may be on future insurance coverage before drafting. 

The buyer’s offer included an inspection contingency where the seller had a right to cure. During the inspection, the buyer’s inspector noted hail damage to the siding. The buyer then asked for clarification on any insurance claims related to this hail damage. The seller didn’t know about the damage, and upon receipt of the notice of defects, called for the insurance adjuster to view the property. The adjuster confirmed the damage and stated there would be a $7,000 payout for repair. What’s next in this situation?

Based on the scenario here, it sounds like this damage happened before the offer was accepted, and thus the “Property Damage Between Acceptance and Closing” provision of the WB-11 Residential Offer to Purchase would not apply. Given the seller was not aware of the hail damage, it was not disclosed in the RECR. This situation highlights the value of the inspection contingency: to allow the buyer and seller a process to address defects found by the home inspector when the defects were unknown to the parties at the time of the offer. Once the buyer delivers a notice of defects regarding the hail damage, the seller has 10 days to make one of three decisions: elect to cure, make the offer null and void, or attempt an amendment. The seller, by amendment, may offer the buyer the $7,000 check from the insurance company for the siding. If the buyer does not like that option, the seller is free to decide that he will not cure and make the offer null and void or elect to cure and use insurance proceeds to do so. 

The broker has a listing with a pending offer set to close September 30. There was a hailstorm before the offer was written, and the seller had the insurance adjuster look at the roof for hail damage. The broker learned the seller received insurance proceeds of over $4,000 for damage to the roof. The seller did not repair or replace the roof, nor did the seller disclose the roof condition in the RECR. Should the licensee disclose the roof condition, the fact there was a claim or the insurance payout?

Whether the condition of the roof or the fact that there was an insurance claim filed, which resulted in a $4,000 payout for hail damage to the roof, constitute a fact a licensee needs to disclose as a material adverse fact is a judgment that only the licensee can make after considering all the facts and circumstances in the situation. It would appear the seller has received proceeds for hail damage but did not repair or replace the roof. If the licensee knows there is information about the condition of the roof in the RECR that is inaccurate, incomplete or inconsistent with the licensee’s knowledge, it is appropriate to disclose in writing because licensees are to disclose material adverse facts and information suggesting material adverse facts. The fact that there was an insurance payment may influence whether the buyer will be able to insure the property and at what terms because insurance rejections may be based upon the condition of the property or prior claims related to the property. However, the broker is not necessarily required to disclose the amount of the insurance proceeds the licensee will also disclose.  

Property damage during the transaction  

A buyer wrote an offer that the seller accepted right before a major hailstorm went through the community. The storm damaged the roof and siding on the home. The seller now refuses to fix the damage and to return earnest money. Is the offer now null and void?

Lines 468-477 of the 2020 WB-11 Residential Offer to Purchase direct the parties of actions to take when the property is damaged after acceptance and before closing. The offer does not become null and void automatically. Damage to the property between acceptance and closing is controlled by the offer to purchase signed by the parties. Often referred to as the “5% provision,” this section breaks down a variety of situational outcomes.

Damage is less than 5%  

Unless modified, the WB-11 provides in the “Property Damage Between Acceptance and Closing” section that if the damage is in an amount of not more than 5% of the selling price, then the seller shall be obligated to repair the property and restore it to the same condition that it was in the day the offer was accepted. No later than closing, the seller is to provide the buyer with lien waivers for the repairs. If the seller is unable to make the repairs before closing and the buyer does not wish to explore the default remedies, the parties could amend their contract to provide a resolution, which may include a repair escrow holding insurance money, adjustment of the purchase price, and/or a possible extension of the closing date. If the closing cannot be extended for whatever reason, it would be prudent for the parties to speak with their respective attorneys with as much information as possible from the repair contractors and the assigned insurance claims adjuster. 

Damage is more than 5%  

The seller must promptly notify the buyer in writing of the damage, and then the buyer has the option to cancel the contract. If the buyer wishes to go forward with the offer, the buyer is entitled to the insurance proceeds, if any, plus a credit toward the purchase price equal to the amount of the seller’s deductible on the policy. If the seller is financing the agreement by land contract or mortgage, any insurance proceeds must be held in trust for the sole purpose of restoring the property. Obviously, the parties are always permitted to make any agreement relating to damage and repair via an amendment regardless of the value of the damage. 

Discovery after the transaction  

An agent had a transaction close a few weeks ago, and the agent was working with both the buyer and the seller. The buyer has since discovered hail damage. The seller was unaware of the hail damage. Can the agent assist the parties even though this transaction has closed? 

In this scenario, the licensee is facing a difficult situation because the transaction already closed. Therefore, the licensee involved no longer has any authority to try to negotiate a resolution between the parties. The parties should be referred to legal counsel and insurance providers to obtain guidance on how to resolve the issue. 

If the parties do not have an attorney, they may use the Wisconsin State Bar’s Lawyer Referral and Information Service (LRIS) to be referred to attorneys in their area who have practice in matters related to the potential dispute. Attorneys referred through the LRIS agree to provide the first consultation of up to one half-hour for free. The parties can reach the LRIS by phone at 800-362-9082, Monday-Friday, 8:00 a.m.-5:00 p.m., or online at www.wisbar.org/forPublic/INeedaLawyer/Pages/i-need-a-lawyer.aspx. 

Clue reports 

Comprehensive Loss Underwriting Exchange (CLUE) is a loss history information database developed and used by insurance companies to share information about insurance claims, reported losses and damage, and even insurance policy inquiries with respect to properties and individuals. The CLUE Personal Property report provides a five-year history of losses associated with individuals and their personal property. The date of loss, loss type and amount paid, along with general information such as policy number, claim number and insurance company name are provided for each identified loss. The report also lists all companies that have inquired about the person’s loss history in the last two years. Seventy percent of all CLUE reports have no reported claims or paid losses – the average homeowner files an insurance claim only once every 10 years. Some sellers may not remember the details of property damage events very well, such as water intrusions, so having the seller order their CLUE report serves as a backup measure to double check that nothing is missed.

Real estate agents and prospective buyers cannot order or obtain CLUE reports. Should prospective buyers want a CLUE report for a property, they should make it a condition of the offer to purchase that the seller request and provide a report. Listing agents can include provisions in the listing contract if they want to require sellers to have a CLUE report available for the listed property.

Sellers may request a CLUE report at www.choicetrust.com. For more information on CLUE reports and insurance issues, see Legal Update 03.04, “Addressing Transactional Property Insurance Issues in Wisconsin,” at www.wra.org/LU0304 and the Wisconsin Office of the Commissioner of Insurance fact sheet at oci.wi.gov/Documents/Consumers/PI-207.pdf.