Vol. 77, No. 7, July 2004

Clue Reports: A Tool to Discover Property Problems

Sidebars:

• Wisconsin Real Estate & Real Property Codebook Updated

by Mark C. Young

Imagine that you are a home buyer, purchasing a "perfect" house. Nothing appears out of place. But unknown to you, the sellers made a claim against their insurance carrier last year for damage from a lightning strike. While there is no obvious lingering damage apparent, the claim was for more than $8,000, so the lightning caused some significant harm. As the buyer, had you known of the claim, you might have wondered, did the lightning strike cause any fire? Was the wiring in the home compromised? Was the resulting harm limited to the seller losing a state-of-the-art big screen TV? But all of this assumes you found out about the lightning strike in the first place.

Most home buyers want to learn as much as possible about their new homes. This desire has led to several means of discovering such information, among them the Wisconsin statutory requirement that sellers provide buyers with a condition report relating the seller's knowledge of the property,¹ the federal requirement that sellers disclose their knowledge of the presence of lead-based paint,² and the prevalence of professional home inspections. Indeed, both a home inspection and a condition report are printed contingencies in standard offer to purchase contracts in Wisconsin.

Buyers now have an additional tool available to discover potential problems with their new home - a report of the seller's insurance claims during the past five years, called a C.L.U.E.^® report.

What Are C.L.U.E. Reports?

C.L.U.E. is an acronym for Comprehensive Loss Underwriting Exchange. The Exchange was developed by a company called ChoicePoint, based in Alpharetta, Georgia, that also provides credit reports and other business and consumer reports. The purpose of the Exchange was to create a database of information supplied by insurance companies on their claim and loss histories. That database now contains more than 40 million homeowner insurance loss claims.³ Those same insurance companies could then search the database when evaluating and underwriting new policies. Every month, participating companies submit their loss information to ChoicePoint, which then updates its database. A competitor of ChoicePoint, Insurance Services Office Inc., based in New Jersey, provides a similar service, although the Web site of ChoicePoint is easier to use and appears to be geared more to consumer use than that of Insurance Services. Both companies claim that 90 percent of casualty insurers in the United States now share their claim histories with ChoicePoint.⁴

A C.L.U.E. report contains a claim history for a property for the preceding five years. Similar to a credit report, a C.L.U.E. report reveals the claims history of an insured person, but also reports on the loss experience of the insured properties. The reports have been used by the insurance industry as an underwriting tool for more than a decade to more accurately assess insurance company risks. When a consumer seeks new insurance, the company considering issuing the policy can quickly and inexpensively obtain information on the claims history of potential policy holders, as well as of the properties the company may be insuring, and underwrite appropriately.

While buyers usually care little about the seller's personal claim history,⁵ they should be curious about the claims history of the property they are about to purchase. Was there a kitchen fire three years ago? Was there a lightning strike? Was there damage from a burst water pipe, an ice dam, or a sewer back-up? The potential list of nuggets that can be culled from the claims history of a property is limited only by the catastrophes that can befall any property.

Who Has Access to C.L.U.E. Reports?

The federal Fair Credit Reporting Act of 1970 (FCRA), as amended in 1997,⁶ applies to C.L.U.E. reports, just as it does to financial credit reports. Thus, the FCRA limits access to the report to insurance companies and to the current property owner. A C.L.U.E. report lists the amount of any claim paid and the nature of the claim. In addition to showing claims, the report may even show mere inquiries about coverage. For example, a buyer may learn that a house is susceptible to ice dams, due to seller calls to the insurance company over the past few winters inquiring as to what repair costs might be covered under the seller's policy. The calls may never result in an actual claim, for example, when the damage is less than the deductible, but the call alone may be enough to receive mention in a C.L.U.E. report. The mere call reference in the report should prompt a cautious buyer to inquire further of the seller, or even to have an additional inspection of the roof to determine if the roof is unduly subject to ice dams, or whether there is any latent damage lurking from past leakage.

Because only the owner of a property or an insurance company may obtain a C.L.U.E. report, buyers need to include a contract contingency requiring the seller to provide the C.L.U.E. report. The contract contingency should require the seller to provide the report and should allow the buyer to cancel based on the information in the report.

Sample Clause:

C.L.U.E.^® Insurance Report. Seller shall deliver to Buyer a current C.L.U.E. insurance report on the subject property within five (5) days of acceptance. Buyer may cancel this contract on the basis of adverse matters noted in the C.L.U.E. report by delivering to Seller a notice of cancellation no later than three (3) days after actual receipt of the C.L.U.E. report.

The time frame for supplying the report should be short, with the deadline ideally falling before the buyer's professional inspection of the property, so that the buyer's inspector may focus on any problem areas that were the subject of a claim, and cast a sharp eye for any lingering damage or defects.

A C.L.U.E. report can be obtained online at a nominal cost ($9 as of June 2004). Simply log on to the ChoicePoint Web site, www.choicetrust.com, and provide some basic information such as address and Social Security number. ChoicePoint then checks this information against the seller's credit information, such as the most recent mortgage against the property, and offers the seller a multiple choice selection of potential verification answers. If the correct ones are selected, the report is immediately available for a credit card payment. The whole process takes less than five minutes.

Once the report is presented on screen, the requester can direct that it be sent to other email addresses, such as those of the buyer, the broker, or an attorney.⁷ The key information contained in the report is emailed to these designated recipients, although nonpertinent personal information, such as Social Security number and birthdate, is deleted. With this ability to obtain a C.L.U.E. report so promptly, it is not unreasonable for buyers to require that the report be provided within three to five days of acceptance. With the inspection period typically lasting 10 to 12 days, the buyer has an adequate opportunity to review the report and provide it to the buyer's inspector in advance of the inspection.

How Can a C.L.U.E. Report Benefit Sellers and Buyers?

The seller may want to obtain a C.L.U.E. report in advance of a sale, to provide to any interested buyer. Not only is the seller prepared for a buyer who later requests the report, but the seller is also able to provide some tangible evidence that the property is "clean," at least in relation to any problems that would have been covered by insurance. For a property with no claims in the five years before the sale, a report can be a positive marketing tool. Even if there are claims noted in the C.L.U.E. report, however, the seller may gain some insulation against a later claim by the buyer based on nondisclosure as a result of the disclosures provided in the C.L.U.E. report. Indeed, if the seller has made a claim for damage and does not disclose it, the seller will be at a considerable disadvantage if the buyer later sues based on a defect related to the claim. The buyer could quite easily obtain the report through discovery and use it to establish the seller's knowledge of the claimed defect.

Another reason for a seller to order a C.L.U.E. report in anticipation of a sale is to verify that information in the report is correct. As with credit reports, an owner may challenge information he or she believes to be incorrect. The procedure is similar to addressing errors in a credit report. ChoicePoint has a consumer center that will check with the insurance company that reported the challenged information and will notify the owner of the company's response within 30 days of the owner's challenge. If the owner is correct, the C.L.U.E. report will be corrected. If the information remains disputed by the owner and the insurance company, the owner has the right to add an explanation to the C.L.U.E. report, just as a consumer does with a financial credit report dispute. In addition to correcting inaccurate information about the property, the seller also should confirm the accuracy of his or her claim history, which could affect the seller's ability to obtain insurance on the seller's next home or increase its cost.

Are there matters in the C.L.U.E. report that a seller may not want to disclose? It is always possible that some claims may embarrass some sellers, although such cases are fairly rare.⁸ Bearing in mind that some claims under homeowner policies relate to matters without any connection to the home, such as personal property stolen from a vehicle, a seller who has privacy concerns flowing from a particular claim may want to negotiate for the exclusion of this type of information by including a provision allowing disclosure of only claims that relate solely to the property's physical condition.

In reviewing a C.L.U.E. report, a buyer should be mindful of claims that do not relate to the property's condition yet may be of concern to the buyer. Chief among these would be break-ins and vandalism. If there have been, for example, three claims for vandalism and a break-in over the last two years, the buyer may be justifiably concerned about the safety of the area in which the property is located. On the other hand, a nervous or wary buyer who has expressed misgivings about the area (perhaps after receiving gratuitous, if erroneous, advice from friends and relatives) may find comfort in the absence of any claims during the last five years.

As always, it is wisest for a seller to disclose any known defects to the buyer. This becomes more important when a "clean" C.L.U.E. report is provided. A buyer might later argue that the seller used the C.L.U.E. report to mislead the buyer into incorrectly believing that there were no defects in the property. While the lawyer for the buyer or seller will appreciate the distinction between a past insurance claim and a current defect, an unsophisticated buyer may not, especially when an enthusiastic seller has oversold the property.

The ready availability of C.L.U.E. reports provides buyers with yet another weapon in their investigatory arsenal. The reports are inexpensive and easily obtained and may just cast illumination on a potential problem with the home the buyer intends to purchase.

Endnotes

¹Wis. Stat. § 709.02.

²40 C.F.R. § 745.107.

³"You Revealed; CLUE reports give insurance companies insight into your claim history," Milw. J.-Sentinel, July 19, 2003. While this article is focused on homeowners' insurance claims, the ChoicePoint database also has records of more than 170 auto insurance claims.

⁴Both ChoicePoint and Insurance Services Office Inc. claim to receive information from 90 percent of the country's insurers. "For your insurance history, get a CLUE," Seattle Post-Intelligencer, Sept. 20, 2003.

⁵Insurance carriers are, quite logically, interested in whether a potential insured has a history of making claims against carriers for property damage.

⁶Fair Credit Reporting Act of 1970 (codified at 15 U.S.C.S. § 1681).

⁷The report may be sent to up to 25 email addresses, although it is hard to imagine the need to provide it to so many persons.

⁸If the claim is for personal property stolen from the home, the seller may not want to disclose what was stolen (items in a valuable collection or an unusual hobby). In a more unusual example, some property owners have sought coverage under their homeowner's insurance for claims they infected a partner with a sexually transmitted disease.

Wisconsin Lawyer