It sounds like something that would only happen once in a lifetime.
Two days before closing, the home our buyer was purchasing suffered catastrophic fire damage. The structure was essentially a total loss.
And then we discovered something even more surprising:
The seller did not have homeowner’s insurance.
What happens in a situation like this?
Is the seller required to rebuild?
Is the buyer still obligated to close?
Who bears the financial risk?
This real-life scenario highlights an important — and often overlooked — gap in many real estate transactions.
Let’s walk through what happened and what buyers, sellers, and agents can learn from it.
The Timeline
The buyer had completed inspections. Financing was approved. Closing was scheduled. Moving plans were underway.
Then, just 48 hours before closing, a fire severely damaged the property.
At first, we assumed the situation would follow a fairly standard path:
-
The seller would file an insurance claim.
-
The closing would likely be extended.
-
Repairs would be made, or insurance proceeds would be assigned to the buyer.
But that assumption quickly unraveled.
There was no insurance policy.
What Does a Standard Minnesota Purchase Agreement Say?
In Minnesota, most transactions use forms provided by the Minnesota Association of Realtors.
These agreements typically include a “risk of loss” provision. In general:
-
If the property is substantially damaged before closing, the buyer has the right to cancel the contract and receive a refund of earnest money.
-
Alternatively, the buyer may choose to proceed and accept any insurance proceeds resulting from the damage.
Here’s the key detail:
These agreements generally do not require the seller to maintain homeowner’s insurance during the contract period.
It’s often assumed they do.
But assumption and contract language are not the same thing.
Why Insurance Changes Everything
In most fire-before-closing scenarios:
-
The seller files an insurance claim.
-
The insurance company evaluates the loss.
-
The buyer and seller negotiate next steps:
-
Delay closing while repairs are completed
-
Or close as planned and assign insurance proceeds to the buyer
-
Insurance provides options.
Without insurance, there are no proceeds to assign and no funds available to rebuild.
That’s what made this situation so complicated.
Was the Seller Responsible to Rebuild?
Legally, no.
While the loss was devastating, the seller was not contractually obligated to rebuild the home. The standard purchase agreement did not require them to maintain insurance or guarantee restoration in the event of catastrophic damage.
The buyer, on the other hand, was not obligated to move forward with the purchase of a burned structure.
The result?
The contract was terminated. Earnest money was returned. The buyer had to start their home search all over again.
Everyone walked away — but not without frustration, stress, and lost time.
The Practical Consequences
Even when everyone acts within their legal rights, situations like this are messy.
-
The buyer had invested time, inspection costs, emotional energy, and planning.
-
The seller faced a total property loss with no insurance safety net.
-
The lender could not fund a mortgage on a severely damaged structure.
-
There was no clean or creative path to salvage the transaction.
This wasn’t about fault.
It was about risk.
And risk management is something we don’t always talk about enough in real estate.
Lessons for Buyers
1. Don’t Assume the Seller Is Insured
Most homeowners carry insurance. But “most” is not “all.”
Buyers rarely verify whether the seller has active coverage during the contract period. In a typical transaction, that never becomes an issue — until it does.
Asking the question upfront may feel uncomfortable, but it could prevent major complications.
2. Understand the Risk of Loss Provision
Many buyers focus on price, inspections, and financing — all important. But the “risk of loss” section of the contract can become critical in rare but serious events like fire, storm damage, or other catastrophic loss.
Understanding your rights before something happens is far better than learning them afterward.
3. Consider Stronger Contract Language
This experience has prompted an important conversation:
Should buyers request additional language stating that the seller must maintain homeowner’s insurance through closing?
A clause as simple as:
“Seller agrees to maintain property insurance in full force and effect through the date of closing.”
could significantly reduce uncertainty in situations like this.
It doesn’t eliminate risk — but it provides protection.
Lessons for Sellers
Homeowner’s insurance is not just a lender requirement — it’s financial protection.
Without it:
-
A fire becomes a complete personal loss.
-
You may still owe a mortgage.
-
You may lose the ability to sell.
-
You may face significant financial hardship.
Even if you own a home free and clear, insurance is essential.
Lessons for Real Estate Professionals
As agents, we are constantly learning.
This situation has raised important questions:
-
Should we verify insurance coverage during listing?
-
Should we discuss catastrophic risk more proactively with buyers?
-
Should insurance maintenance clauses become more common?
Real estate contracts cover many scenarios, but no agreement anticipates every real-world situation perfectly.
Sometimes experience reveals gaps we didn’t realize were there.
And when that happens, we adjust.
The Bigger Picture
Buying and selling real estate isn’t just about negotiating price and scheduling inspections.
It’s about managing risk.
Most transactions move smoothly from contract to closing. But rare events — fire, storm damage, unexpected loss — remind us that until closing occurs, uncertainty still exists.
In this case, the buyer ultimately chose not to proceed and had to begin the search again. It was disappointing, but it was the right decision given the circumstances.
The silver lining?
It sparked an important conversation about preparation, protection, and better contract practices moving forward.
Final Thoughts
This was a difficult experience for everyone involved. No one expected it. No one wanted it. And no one benefited from it.
But it reinforced something important:
In real estate, the details matter — especially the ones we assume we’ll never need.
If you’re buying or selling a home and want to understand how risk is handled in your purchase agreement, we’re always happy to walk through it with you. Preparation doesn’t prevent every problem — but it can prevent surprises.
And in real estate, that makes all the difference.