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Natural Hazard Disclosures — What They Are and How They Can Prevent Real Estate Lawsuits

Some locations in the United States are more synonymous with disasters than others — wildfires in California, hurricanes in Florida, and earthquakes along the west coast. However, it is not always obvious when visiting a neighborhood that natural hazards exist, especially for new people to the area. 

CRES Natural Hazard Disclosure (NHD) reports can help prospective buyers to understand what they’re buying into. They provide valuable insight into any natural hazards that exist where the property is located. This means buyers can make an informed decision before they hand over their hard-earned money. NHD reports are not only beneficial to buyers — they are also an asset for real estate licensees and their sellers. 

In California, NHD reports are a requirement for residential transactions. They are recommended nationwide, but not mandatory. CRES is partnering with two NHD report providers — The Disclosure Report NHD and MyNHD. Here is an overview of what NHD reports cover and how they can be used to prevent claims. 

Overview of NHD Reports and What They Cover

The NHD report will outline whether the property address is located in:

  • A special flood hazard area
  • An area of potential flooding
  • Very high fire hazard severity zone
  • A wildland area that may contain substantial forest fire risks and hazards
  • An earthquake fault zone
  • A seismic hazard zone (including landslide zone and liquefaction zone)

Tsunami inundation hazards, naturally-occurring asbestos areas, critical habitats, abandoned mines, sinkholes and methane gas zones are also noted in the report, among other potential hazards.

Additionally, the report advises if the home is within one mile of a former military ordnance site or commercial/industrial use zone and within two miles of an FAA-approved landing facility. 

An explanation of each hazard is included along with links to further information, and maps are linked where possible. For example, if the property is in a very high fire hazard severity zone, the report will link to a map that can be viewed to show the area affected. 

Property tax information is also provided, to help new buyers to estimate their property tax and supplemental tax liabilities. 

Key Benefits of NHD Reports

NHD reports offer benefits to buyers, sellers, and real estate licensees:

Benefits to Buyer

Buying a property in an area where natural hazards exist can be disastrous for a buyer. If they unknowingly buy into an area where there are increased risks, they may lose their home, or the property may suffer unexpected damage if a major disaster event occurs. 

Buying into a natural disaster risk zone may also impact a property’s insurability. Some properties may not be able to be adequately protected by insurance because of the high risk location (or the insurance cost may be high).

However, in strong property markets, buyers are likely to still buy into these zones —- they may simply choose to negotiate on price for the trouble. 

Benefits to the Seller

There may be natural hazards that exist in the area that the seller may not be aware of. This is common, particularly if the sellers  are investors or if they’re residents that have lived in the area for a short time. 

If the property is in a natural hazard area or there are increased risks that will materially affect the property price or decision to purchase, the seller needs to disclose this to the buyer. The seller can be sued, even if their failure to disclose was accidental or an inadvertent mistake. NHD reports can help against this threat of future lawsuits, because it helps sellers be upfront and transparent in their disclosures before closing. If a claim is made against them, they can say they provided the Natural Hazard Disclosures so the buyer was informed of the risks before closing. 

The other benefit for sellers is that when a CRES E&Oinsured real estate licensee purchases a Natural Hazard Disclosure Report on their behalf, the sellers receive a $25,000 Seller’s Protection Plan. This gives the seller 180 days of coverage (with an option to extend for a further 180 days) after closing. Should a buyer make a claim against the seller during this time, the Seller’s Protection Plan will help cover the seller’s legal defense costs up to the limit of the plan, and also offers an opportunity to settle the claim out of court. This can save money, stress, and time for the seller.

Benefits to the Real Estate Licensee

If a disgruntled buyer finds the property they have purchased is at a high risk of natural hazards or other defects are found, they might not just sue the seller. Real estate licensees are at risk of facing a lawsuit too. One of the main reasons that licensees are sued in real estate is due to a real or perceived ‘failure to disclose’. Purchasing an NHD for your seller can help to protect you as well as them.

Because your seller will also receive a $25,000 Seller’s Protection Plan with the NHD if you’re a CRES E&O policyholder, this is a great way to give you a competitive edge. Not all licensees provide this coverage, so it will help you to differentiate against your competitors, and help to drive new listings, while also keeping your sellers happy. 

Find Out More About NHD Reports and How They Can Help You

Find out more about NHD reports and view sample reports. CRES can provide NHD reports in 48 states (unavailable in Alaska and Hawaii). 

As part of one of the largest insurance brokers in the world, CRES has access to more E&O options than just about anyone. Let us find you the best real estate E&O coverage at the best price. Call our toll-free number 800.880.2747 today.

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