Is a Home with Foundation Problems an Insurance Risk?

By Kathryn Hawkins, InsWeb.com

You’ve just gone under contract on your dream home. But at your home inspection, your inspector detects signs of cracked floors and buckling walls, suggesting a potential problem with the foundation. Is it safe to go ahead with the purchase?
Be cautious, says Bill Begal, owner of Begal Enterprises Inc., a Maryland-based disaster restoration company that frequently negotiates with home insurance companies. Most of the time, a cracked or broken foundation isn't covered by a home insurance policy, Begal says.

This means that if more significant structural damage occurs as a result of a faulty foundation, your insurer won’t be required to pay for these repairs.

Stabilizing or replacing a damaged foundation can be extraordinarily expensive. Repairs such as underpinning a house with concrete or steel piers and replacing the foundation floor can cost as much as $30,000, according to CostHelper.com. Often, landscaping and decking must be removed to access the foundation, adding thousands of dollars to the project.

So what can you do to protect yourself from the likelihood of foundation problems, and which insurance policies or add-ons might help you? Here are five strategies to consider:

1. Consult a structural engineer.
During the inspection period on your house, hire a structural engineer to analyze the cause and severity of the foundation problems, Begal says.
“I would want to find out why there might be foundation issues,” he says. “Did the builder use the appropriate amount of steel or rebar before pouring the foundation, or is the home on a floodplain?”

The structural engineer will write a report detailing the damage and outlining potential solutions.

2. Get estimates for repair work.
If the engineer determines the foundation issues are more significant than simple settling, he likely will recommend repairs or replacement. Consult several foundation repair companies for quotes, and ask the home seller to finance the repairs or share the cost.

In general, the seller should complete the work before you move in, so that you’re not on the hook for more expenses if the damage is more extensive than had been suspected.

If the seller won't agree to finance any of the necessary repairs, it’s probably in your best interest to walk away from the deal.

“Sometimes people see a bargain, and it turns into a money pit,” Begal says.

3. Once you complete the sale, compare home insurance policies carefully.
Whether immediate repairs are necessary or not, be sure to closely evaluate home insurance policies to find out what's covered in case of damage stemming from foundation problems.

Homeowner's policies typically contain numerous exclusions, such as those for foundation cracks, wear and tear, and faulty workmanship, says Christine Gudaitis, an attorney at Florida law firm Ver Ploeg & Lumpkin.

If damage occurs because of foundation issues or other listed exclusions, the subsequent repairs won't be covered by your home insurer. However, Gudaitis says, further damage known as an “ensuing loss” may be covered.

“If the property settles and cracks the foundation, that would likely not be covered,” she says. “But if as a result of the settling and cracking, water comes in and further damages the house, that may be covered.”

If possible, buy a home insurance policy that includes coverage for ensuing losses.

4. Add to your current policy.
Even after getting foundation repair work done, your home’s foundation still may be fragile and vulnerable to further damage. Therefore, you may want to consider supplemental coverage (riders) such as earth movement insurance, which will protect your property in case of earthquakes and other ground movement; flood insurance; and sinkhole coverage. Insurers in Florida are required to offer catastrophic “ground cover collapse” (sinkhole) coverage. But “you may wish to purchase a rider to cover non-catastrophic sinkhole coverage,” Gudaitis says.

5. Consult a lawyer for help with a denied claim.
If your home is damaged by a foundation issue that you think should be covered under your homeowner’s policy or riders, you may want to contact an insurance attorney to discuss whether your claim is valid.

“We would undertake a careful analysis of the policy language,” Gudaitis says. “Sometimes we have to tell the potential client that, based on the documentation, there is no coverage for a claim. But if the damage appears to be covered under either the coverage grant of the policy or an exception to an exclusion, we may be able to get the claim approved."

If you don't want to reach out to an attorney for help with a claim, you can contact your state insurance department or a consumer advocacy group such as United Policyholders.