Water-damage disclosure issues

What is it, when must the seller disclose it, and how does all this affect insurance coverage?

by Ron Walker   

Q   What does water penetration mean as it is used in the Seller’s Disclosure Notice?

A   Water penetration typically refers to items related to the structure, such as ceilings, walls, roofs, foundations, and windows. The source of the water is not the determinative factor when ascertaining whether water penetration has occurred. In simple terms, water penetration is the entering of water in a place it should not otherwise be by piercing or diffusing through something. For example, water may penetrate through the roof into the attic and ceilings. It may also penetrate into a slab by a plumbing leak.

Here is what TREC rules require of inspectors with regard to water penetration:

"In foundations the inspector must report as in need of repair conditions or symptoms that may indicate the possibility of water penetration that are present and visible, such as improper grading around foundation walls or plumbing leaks. The inspector must report as in need of repair water penetration that is present and visible in interior walls, interior doors, ceilings, floors, exterior walls, exterior doors, windows, door glazing, and, if applicable, outbuildings."

Q   Must a seller disclose previous water penetration?

A   If the water penetration has been cured, there is no longer any water penetration. The Seller’s Disclosure Notice does not require the seller to disclose previous water penetration problems, except for floods. If water penetration has been cured but the water penetration caused an ensuing defect (like a cracked slab), the ensuing defect would need to be disclosed until cured. The only items concerning previous repairs that the TAR Seller’s Disclosure Notice requires to be disclosed are previous fires, previous flooding, previous structural repairs (roof and foundation), previous termite treatment and damage, and previous environmental remediation other than routine maintenance.

Q   If a seller filed an insurance claim for water damage in the last few years, must he disclose this fact to the buyer?

A   The answer is the same as in the previous question. Considering that insurance companies have been increasingly more selective in determining which properties the companies will insure, a buyer or seller may find it difficult to obtain affordable insurance for the property in light of a previous water claim. This is a factual issue that is specific to each property. A seller who filed such an insurance claim in the recent past may find it beneficial to determine if insurance for the property is generally available and affordable. Alternatively, the seller may choose to disclose the fact that the seller filed a previous insurance claim for water damage in order to encourage the buyer to determine early in the transaction if the buyer can obtain insurance for the property. Determining insurability and the affordability of insurance early in a transaction will help eliminate a delay in selling the property to an otherwise qualified buyer.

Q   What does the standard homeowner insurance policy in Texas cover with regard to water damages?

A   In prior years, the most commonly issued homeowner insurance policy in Texas was known as the HO-B policy. It covered the homeowner for nearly every type of water casualty (except floods) and ensuing damages such as mold. This policy was a "replacement cost" policy. Significant changes were made to the old HO-B policy in January 2002. There are now varying degrees of HO-B policies, all of which are similar, but with different levels of coverage at different costs.

Another common homeowner insurance product was known as the HO-A policy, which was a "named peril, cash value" policy. The old HO-A policy offered little coverage in comparison to the old HO-B policy. Since January 2002, many insurance companies have offered enhancements to the HO-A policy. The result is that there are a number of different policies currently available with varying costs. In light of the fact that insurance companies are increasing premiums and are becoming increasingly more selective about which properties they will insure, it seems prudent for buyers to investigate the insurability and affordability of insurance early in a transaction.

Considering the current situation, TAR encourages prospective buyers early in the transaction to find an insurance agent who will represent the buyer, will review levels of coverage and costs with the buyer, has access to several insurance packages, and will make appropriate recommendations to the buyer. Ideally, the buyer will be able to evaluate the insurability of the home and the affordability of the insurance within the buyer’s option period (if applicable). Insurance issues have recently become more complex, and it seems best for the buyer to seek an expert in this area in the same way that the buyer seeks out other experts in the transaction.

Ron Walker is director of legal affairs for TAR.

Photo © PhotoDisc.

home   current issue    top 10    resources 

discussions   contact us   search

Buyers & sellers, visit www.texasrealestate.com.
REALTORS®, visit www.texasrealtors.com.

Ideally, the buyer will be able to evaluate the insurability of the home and the affordability of the insurance within the buyer’s option period.