Selling a House With an Open Insurance Claim

The one question that matters

You have an open insurance claim and a buyer. Everything else about this situation reduces to one question: who receives the claim proceeds, and who is responsible for doing the work?

Those two can end up in different hands, and that is where the trouble is. A seller who keeps the money and leaves the damage, a buyer who inherits the damage and no money, or a cheque made out to somebody who is no longer the owner. All three happen, and all three are avoidable by deciding the point in the contract rather than assuming it.

This article is what to establish and who decides. It does not tell you who owns the proceeds in your case, because that depends on your policy wording, your contract and whether a mortgagee is named, and none of those is something a website can read for you.

What actually decides it

• Your policy. Who the insured is, who is named as a loss payee or mortgagee, and what the policy says about the property being sold. Read it, and if you cannot work it out, ask your agent to put the answer in writing
• Your purchase contract. This is the one most people leave silent. A contract can say the proceeds are assigned to the buyer, retained by the seller, held back at closing, or that the repair must be completed before closing. If it says nothing, you are relying on everybody agreeing later
• Whether a mortgage company is involved, which is the next section, because it usually is and it changes everything about the timing
• The type of claim and its stage. A claim where the work is done and the final payment is outstanding is a very different thing from one where nothing has been inspected yet
• Whether the loss affects insurability for the buyer, which can matter more than the money. Our article on house insurability in Oklahoma covers why a claims history follows the property

The mortgage company is probably holding the money

This is the part sellers discover at the worst moment. Where there is a mortgage, the lender is commonly named on the policy, and on a claim of any size the cheque is frequently made out to both of you, or the funds are released in stages against proof that the work has been done.

What that means practically:

• You may not be able to simply take the money and hand the house over damaged
• Funds held by a servicer can take time to release, and that timetable is not yours. If your closing date depends on it, the closing date is not really yours either
• A payoff at closing changes the picture. Once the mortgage is paid off, the servicer's interest in the funds ends, but what happens to money it is already holding is a question to ask them directly and early
• Ask the servicer in writing: what is held, what releases it, how long that takes, and what happens to it if the property is sold

Our article on your escrow account when you sell covers the related question of what happens to the money the servicer already holds for tax and insurance.

The three ways this is normally handled

1. Complete the repair before closing. Cleanest where the money has been released and a contractor is available. The claim closes, the house is repaired, and the buyer gets what they expected. It needs time, and time is usually the thing in short supply.

2. Assign the claim to the buyer. The buyer takes the property and the benefit of the claim and does the work themselves. This needs the insurer's cooperation and clear contract language, it is not automatic, and whether it is possible at all depends on the policy and the insurer. Ask before you promise it.

3. Adjust the price, or hold funds back. The price reflects the unrepaired damage, or an agreed sum is held at closing against the work. Both are clean if they are written down properly, and the holdback version needs to say who releases it, on what evidence and by when.

What does not work is leaving it vague and hoping goodwill carries it. The money arrives after closing, addressed to somebody, and by then the two parties have different interests.

What to settle before you sign a contract

1. Get the claim status in writing from the insurer: what has been approved, what has been paid, to whom, and what remains outstanding
2. Get the scope, which is the itemised list of what the insurer agreed to pay for. A buyer will want it and so will you, because it is the only document that says what the damage actually is
3. Find out what the mortgage servicer is holding and what releases it
4. Decide which of the three routes you want and say so when you market the property, not after an offer arrives
5. Get the contract to say it explicitly. Who receives the proceeds, who does the work, what happens if the insurer pays less than expected, and what happens if the funds arrive after closing. Our article on the purchase contract covers reading the rest of it
6. Disclose the claim and the damage, with the paperwork. It is a material fact, and a buyer who is handed the scope and the photographs trusts the rest of what you say. Our article on Oklahoma seller disclosure requirements covers the obligation
7. Keep every document. The claim number, the adjuster's name, the scope, the payment record, the correspondence. This file is the transaction

What it does to your buyer pool

• A financed buyer brings a lender that generally wants the property in acceptable condition at closing, so unrepaired storm damage frequently has to be dealt with before funding. Our article on FHA appraisal requirements covers how condition becomes a loan condition
• Insurance for the buyer is the quieter problem. A carrier may decline to write a policy on unrepaired damage at all, and without a policy a financed buyer cannot close whatever the lender approved
• A cash buyer has neither constraint, which is why storm damaged property with an open claim so often sells this way in Oklahoma. Our pages on selling a storm damaged house and how long a roof lasts cover the condition side

And the honest version: if the money has been released and the repair is straightforward, do the work and sell the house repaired. It will almost always net more, and we will tell you that on the call.

The short version

An open insurance claim does not stop a sale. What stops a sale is nobody deciding who receives the proceeds and who does the work. Your policy, your contract and your mortgage servicer decide between them, and the servicer is probably holding the money.

Get the claim status and the scope in writing, find out what the servicer is holding and what releases it, pick one of the three routes, and write it into the contract in plain words.