In the course of my home inspection practice, I am frequently asked questions related to home insurance. For example: Does home insurance cover basement leakage and sewage backup? Can a house with aluminum wiring be insured? What is knob & tube wiring, and why is it a concern? Many clients contact me because they're unsure how to respond to questions from insurance companies. Others are asked by insurers to hire me for specific inspections and to provide reports. Based on the feedback from clients, relevant research, and consultation with various insurance providers, I would like to summarize the insurance issues that may arise during the home buying process in this article. However, sensitive industry issues like knob & tube wiring will be detailed in subsequent articles.

In Canada, home insurance is a personal choice, and not mandated by any regulations. However, all financial institutions that provide mortgage loans require the homeowner to have home insurance to minimize their lending risk. Loans are typically not released until proof of insurance is provided. Beyond satisfying lenders' requirements, home insurance offers crucial protection to homeowners against potentially losses caused by unforeseen catastrophic events. It safeguards a major asset, making insurance effectively indispensable. Therefore, most homeowners choose to pursue coverage, whether or not they have fully paid off their mortgage.

It's important to understand the insurance coverage: it only applies to damages caused by unpredictable, sudden, and accidental events. It offers financial compensation for these occurrences, but does not cover foreseeable, preventable issues or routine maintenance, such as basement leaks. Basement leakage usually stems from property defects that can often be detected in advance. Since leakage is often seasonal, and occurs under predictable conditions (e.g., heavy rain or snowmelt), it is generally not insurable.

Typical coverage in standard home insurance includes: fire, windstorms, lightning, theft, explosions, riots, impact damage, and sudden interior plumbing bursts. It does not include floods or chronic seepage/leaks. Optional coverage may include earthquakes or sewer backup. Maximum payouts are based on the cost of rebuilding the property and any insured personal belongings, such as valuables. The above is for general reference only. The binding terms are those agreed upon in the policy contract between the homeowner and the insurer, which should be carefully reviewed.

When assessing a property, insurance companies primarily evaluate the level of risk and potential payout if a claim is made. They aim to understand the condition of the home as thoroughly as possible in order to anticipate and manage risks. When clients contact an insurer to purchase a policy, they may be asked the following questions. It's best to be prepared in advance:

1. Insurers use historical data and existing information to evaluate community risk. For example, if a neighborhood is in a low-lying area that experienced sewer backups during a storm two years ago, they may either decline sewer backup coverage or increase the premium.
2. Basic property information: price, square footage, age, number of stories, garage and outbuildings, number of bedrooms, whether the basement is finished, any special construction materials or features such as fireplaces or swimming pools. These factors help assess property quality and rebuilding costs in the event of a disaster.
3. Electrical system: What is the service amperage? What type of panel (breaker vs. fuse)? What is wiring type - copper/aluminum/knob & tube? These are critical questions. For a typical homes (excluding apartment unit), 60-amp service is considered inadequate, and is usually unacceptable. The homeowner will be required to upgrade to at least 100 amps. Fuse panels are seen as having higher fire risk than breaker panels, but are not typically required to be replaced. Insurance companies are cautious about aluminum wiring due to potential fire hazards, though it's generally accepted. However, they are particularly concerned about knob & tube wiring, which is considered to pose higher safety and fire risks. In summary, different insurers have different policies on aluminum wiring and knob & tube wiring: some require a professional assessment and approval; some require partial or complete upgrade; some accept them unconditionally; others may reject coverage outright (more on this in another article).
4. Heating system: Fuel type - gas/oil/propane? System type - forced air/hydronic/baseboard? How old is the furnace/boiler? Is there an oil tank? Where is the tank located - indoor/outdoor, above/below ground? What is its condition? If the tank is decommissioned, when? Oil heating is considered riskier than gas or electric ones. Oil tanks, especially buried ones, pose environmental risks and can result in costly remediation. They are also fire hazards, and insurers are highly concerned about them (to be discussed further in a separate article).
5. Plumbing system: Water supply piping material - copper/lead/galvanized steel/PEX/PB/Kitec? Drainage piping material - ABS/PVC/copper/cast iron? Have kitchens or bathrooms been renovated? Has the underground water service pipe been replaced? PB piping is generally rejected due to the high failure rate. Cast iron and galvanized steel pipes have a limited service life, and are prone to corrosion and clogging, which can lead to water damage. Kitec piping, due to its immature technology, may corrode, burst, or even fail over time. Insurance companies are generally cautious about these materials (details in a future article).
6. Wood-burning fireplace: It can cause fires or carbon monoxide poisoning. Insurance companies may request a specific inspection (more on this later).
7. Material and age of roofing.
8. Fire safety features inside and outside the property: availability of external water sources (e.g., hydrants, lakes), proximity to fire stations, presence and use of security system, fire alarms, sprinklers, smoke detectors, carbon monoxide detectors, fire extinguishers, etc.
9. Usage of the property: Are there multiple dwelling units? Is the house currently rented, or will it be? Is the home used for commercial purposes? Any change in use should be reported to the insurer promptly, or the coverage may be invalidated.
10. Occupants: How many people live in, and what is the household composition? Do any residents smoke?

Each insurance company has its own set of questions and risk assessment focus. Homeowners should strive to answer questions honestly and accurately. If something is unclear, it's better to say "I don't know" or "I'm not sure." Do not provide false information just to get lower premiums. If a claim is later filed and the insurer finds that false information was given intentionally, they have the right to deny or reduce compensation. This would result in more loss than gain for the homeowner.

The questions insurance companies ask often involve highly specific technical details that most homeowners may not understand. However, if a home inspection has been conducted beforehand, the owner can often find the answers in the inspection report or by asking the inspector. This highlights the value of a pre-purchase inspection.

However, homeowners are not obligated to inform the insurance company that an inspection was conducted or to share the report. Doing so could lead to unfavorable outcomes. Inspection reports are often detailed, list all issues in order to protect the client, and are not suited for use in insurance applications. Insurers might draw negative or unfair conclusions based on the report. In my opinion, for a normal home without unusual bad record, it is excessive and nonstandard for an insurer to request a home inspection report, and homeowners are within their rights to refuse. Remember, determining the home's condition is not solely the homeowner's responsibility - the insurer share that duty.

After a policy is issued, insurers may schedule a follow-up inspection. They might then request some improvements or adjust the policy. Homeowners should act in good faith, and cooperate appropriately while protecting their own interests. There's no need to comply with every request blindly. In Canada's open and competitive insurance market, homeowners can always compare different insurer's offers and find an coverage that best suits their home.

This article was originally published in "Real Estate Weekly", Issue #126, June 08, 2007.