Post-Closing Property Damage & Insurance Concerns

From time to time, we have real estate clients who seek advice after closing regarding some kind of property damage. On occasion, there may be a legitimate property condition that was intentionally concealed by the seller that gives rise to a lawsuit. Fraudulent concealment is actionable, which means that the law provides a remedy if the injured party can meet his/her legal burden in court. Those cases are rare, but they do come up. Another scenario that we occasionally hear about is when a property sustains damage after the closing, but before the Deed is recorded with the County. Whether it’s a few hours or a few days, this lag period between closing and Deed recording can leave the seller and buyer wondering who is responsible for making repairs and whose insurance policy covers the damage. Does the seller still own the house prior to the Deed going on record? Will the seller be out of pocket for the deductible and the damages not covered by the policy?  Questions regarding coverage should always be raised with the insurer, but let’s start with some fundamentals about deeds, conveyances, and homeowner’s insurance.  

Before a property is listed for sale, it’s wise to confirm who owns the asset. Who has the legal title to the property? This is important and sometimes overlooked. A seller, or “grantor,” can only convey the title interest that he/she owns. You know the old saying “You can’t give away what you don’t have.” A seller/grantor who has complete ownership to a property, also known as “fee simple” ownership, can convey complete ownership to a third party; but what about the seller who shares ownership or possession with others? For example, there may be joint owners, life estate owners, lease holds, easement holders, and lien holders. Think of the property as a whole pie, with pieces that an owner can cut out and given to others. The pie may be whole if the owner retains all of the property rights, or the pie may be missing pieces if the owner chooses to give rights to others. Ultimately, when the owner wants to sell the property, he/she can only convey title to what’s left of the pie and the buyer will take title subject to other interests that remain a matter of record. 

Now that we know what our seller can convey to a buyer, or a “grantee,” we prepare a deed. The deed is the legal vehicle by which title ownership is transferred from the present owner to a third party. But when does the deed take effect? When is ownership legally transferred to the buyer/grantee?  

It is a common misconception that your house is still your house until the deed is recorded. That’s not the case. Once a deed is given by the owner/grantor and accepted by the buyer/grantee, the ownership has legally transferred. Without a pre- or post-closing possession agreement, the buyer takes possession of the property at closing and can immediately move into the home. The deed is sent to the County Clerk for recording. We record deeds because we want the conveyance to be a matter of public record. We want everyone to know that the property has a new owner. We want the new owner to have record title so that he/she can sell the property in the future, and we want to avoid challenges or attacks on title from outside parties. However, failure to record the deed does not mean that ownership remains with the seller. From the moment the deed is given by the seller and accepted by the buyer, ownership has transferred. Failure to record the deed could present issues for the grantee if another person comes forward and claims to be the legal owner of the property, but we’ll leave that discussion for another newsletter!  

Most residential real estate transactions require financing through a lender. Lenders can do many things to protect their interest in an asset. They can confirm a buyer’s employment, income, assets, and liabilities to increase the odds of repayment. They can conduct an appraisal to confirm that the loan amount does not exceed the fair market value. They can also condition the release of mortgage funds on the buyer obtaining a homeowner’s (or “hazard”) insurance policy from an insurer who meets the lender’s guidelines. This is because the lender wants to be protected in the event the insured property sustains a loss. The buyer must obtain a “binder” for coverage so that the bank will issue a mortgage, but it makes good sense to purchase homeowner’s insurance even if the transaction is a cash deal. The policy will be issued to the new owner effective as of the date of the closing so that there is no delay in coverage once the buyer becomes the official owner of the property.  

After closing, sellers, who are now former owners, can contact their insurers to terminate their homeowner’s policy and receive a pro-rata refund for their premium. In fact, policy terminations can generally be made retroactive to the closing date if the seller forgets to terminate the coverage right away. That’s because the policy was not likely in effect post-closing. Remember that it’s called “homeowner’s” insurance for a reason. Once the home is no longer an owned asset, coverage typically terminates. 

Let’s go back to the original question of who is liable for damage incurred after closing, but before the Deed is recorded. Remember that the buyer has accepted the Deed and is now the new owner, even though the Deed hasn’t been recorded yet. Assuming the buyer took possession at closing, and cannot show that the seller intentionally or negligently caused the damage, the buyer is likely liable for the damage and will need to decide whether an insurance claim should be filed. Keep in mind that pre- and post-closing possession agreements will give rise to special insurability concerns and that any insurance issue should be directed to the insurer for details regarding the scope and duration of coverage. They are the best resource for your insurance questions. 

– Jacqueline A. Carosa, Esq.