Humber/Ontario Real Estate Course 4 Exam Practice

If a seller prepaid their annual home insurance premium and the sale closes mid-February, what is the correct credit adjustment at closing?

1. No adjustment since the insurance is non-transferrable

2. Seller will be credited the full prepaid amount

3. Seller’s estimated premium reimbursement would be $123.29

4. Credit the seller for the unused premium from mid-February to December 31

5. Adjustments based on buyer's policy

6. Return all unused premiums to the buyer

The correct answer is: Credit the seller for the unused premium from mid-February to December 31

The reasoning behind crediting the seller for the unused premium from mid-February to December 31 is grounded in the principle of fairness in real estate transactions. When a seller prepays their annual home insurance premium, they cover the cost for the entire year. However, if the sale closes in mid-February, the buyer will not be utilizing the insurance for the entire year after taking ownership of the property. Thus, the seller is entitled to a credit for the portion of the insurance premium that covers the time period after the sale closes. This calculation would typically involve determining how many months are left until the end of the insurance period (December 31) and prorating the prepaid premium accordingly. For example, if closing occurs in February and the insurance was paid for a full year, the seller would receive a credit for the unused months from mid-February to the end of December. This practice ensures that both parties only pay for the insurance coverage they are actually entitled to during their respective ownership periods. This adjustment is a common practice in real estate closings to ensure that financial responsibilities are shared fairly based on the actual time of ownership.