What are best practices regarding natural disasters and real estate?

By their very nature natural disasters happen to and on the land. Tornadoes, earthquakes, hailstorms, flooding, and wildfires are all disasters that can strike a community leaving homes and lives disrupted.

There is no getting around the fact that when people are affected by natural disasters, so is their property. Let's take a look at some considerations to think about in areas prone to such problems.

Policy Pause

When the top ten (10) most expensive natural disasters in all Canadian history were charted, seven (7) out of ten (10) happened in Alberta. Surprisingly, the Edmonton tornado in 1987 didn’t even make the list! I wouldn't say that Alberta is accident-prone, but we are a province of vast resources such as enormous tracts of tree-covered lands, glacial-fed rivers and topography that can produce wind turbulence and hailstorms. Albertans are made of tough stuff, and we stand strong together in these adverse conditions.

Unfortunately, the insurance industry is a risk-based business and in times of declared disasters such as active wildfires, most insurance companies will pause insurance writing in that area for some time. The size of the area and the amount of time varies based on the event and the company but suffice it to say that once a disaster is known, insurance companies will pause their underwriting. This temporary pause means new policies won't be written and existing policies won't be changed which causes a big problem for real estate transactions in the process because new mortgages will be conditional on obtaining insurance on the property.

Defaulting Buyer

During wildfire season for example, the buyer is in the most danger of defaulting on the transaction because of the insurance pause. If a wildfire is burning near a community, threatening to move closer to that community, the insurance companies will likely pause all underwriting in the area.

The most practical way to manage this issue as a REALTOR® representing the buyer is to add a condition to the purchase contract which allows the buyer an opportunity to obtain an insurance binder letter on the property before a certain date. This allows the buyer to know:

1. Whether they can be insured
2. If they can’t be insured, be able to collapse the contract

It is important to know that in the absence of such a condition, the seller could hold the buyer in default even if it is impossible for them to close, losing their deposit and being opened to all remedies under the law for costs the seller incurs in the default.

Mutual Agreement

There is always the possibility of mutual agreement between the parties to delay closing or shift dates as well where the parties still want to contract and are willing to move dates as the wind shifts.

If the possibility of a problem is discussed early in the process, a term could be inserted that details the buyer and sellers understand and agree to be flexible. Due to the variability of the:

• Situation
• Disaster
• Client motivations

Any term to manage the closing date extension should be provided by legal counsel and added to the contract by way of amendment. Information should be additionally provided to the seller to not cancel the insurance on their property until the closing date actually happens and the purchase price paid, as the property could be in danger of damage. Once canceled it would be impossible to reinstate mid-emergency even if the closing date extension is agreed to by the parties.

Insurance claims

Let's consider an additional related scenario. Imagine the offer is accepted, the buyer does their due diligence, gets the conditions removed, and then the property is significantly damaged by a natural disaster. The seller and buyer have agreed to the contract and have the legal obligation to complete it. The seller still has property insurance however, the repairs are certain to overrun the closing date. The buyer needs to be made whole, and the seller's insurance needs to make that happen. The most important thing to do in such a situation is to engage both the insurance company and legal counsel immediately after the event. This will allow both the buyer and seller's lawyers to frame an agreement between the parties through the purchase contract that ensures the seller will engage their insurance company to start the work and pay required deductibles, and that the work is the same or better quality than what the buyer contracted for in the original agreement.

Time frames are established with sufficient holdbacks to keep the parties honest and engaged. Don't attempt to manage the complex moving parts of such a situation without legal counsel and as soon as reasonably possible after the precipitating event.

Flood plains

I would be negligent in my advice if I didn't bring flooding back to the forefront of your mind in a discussion about natural disasters. Alberta has several waterways and the river courses we have running through our major cities are glacial fed. That makes for great fresh water but also opens the possibility of seasonal flooding of the banks and floodplains. This is not new information to Albertans and the Alberta government has invested significant resources to map and survey the waterways to determine floodplains, and flood risk areas which can be reviewed at floods.alberta.ca.

Albertans need to understand that the Alberta Disaster Recovery Program (DRP) can only be accessed as insurance of last resort, and one must be able to demonstrate that the peril which damaged or destroyed the property was not reasonably insurable. Currently, the Alberta government generally considers overland flooding as one of those situations in many areas of the province; however, claims are limited in payment, and to only one compensated event ever for that address. Suppose a property does lie in a flood-prone area. In that case, it is a good idea to check the title for a potential registration of this nature or check with the provincial government to see if that one-time coverage has already been used and if the property is being considered for a transaction.

Once natural disasters happen, buyers and sellers must contact legal counsel for quality and timely advice for the specific situation. Apart from possibly crushing the wicked witch in the land of Oz, the reality is that nothing good comes from these events, and they can totally devastate communities. Follow government warnings, stay in touch with buyers and sellers, and know when to seek professional legal advice.