Property Insurance between exchange and completion during sale or purchase of a house
An explanation of the implications of the Standard Conditions of Sale (5th Edition) on the obligation to insure a property during the process of sale/purchase.
The standard Conditions of Sale (5th Edition) was published by the Law Society in April 2011 and is designed for use in residential conveyancing transactions. It is the recommended and the most widely used conveyancing contract by conveyancing solicitors operating in England and the UK.
The specimen document can be found on the Law Society website here
Extract from the document:
5. RISK, INSURANCE AND OCCUPATION PENDING COMPLETION
5.1.1 The property is at the risk of the buyer from the date of the contract
5.1.2 The seller is under no obligation to the buyer to insure the property unless:
(a) the contract provides that a policy effected by or for the seller and insuring the property or any part of it against liability for loss or damage is to continue in force, or
(b) the property or any part of it is let on terms under which the seller (whether as landlord or as tenant) is obliged to insure against loss or damage.
5.1.3 If the seller is obliged to insure the property under condition 5.1.2, the seller is to:
(a) do everything necessary to maintain the policy
(b) permit the buyer to inspect the policy or evidence of its terms
(c) if before completion the property suffers loss or damage:
(i) pay to the buyer on completion the amount of the policy monies which the seller
has received, so far as not applied in repairing or reinstating the property, and
(ii) if no final payment has then been received, assign to the buyer, at the buyer's
expense, all rights to claim under the policy in such form as the buyer reasonably
requires and pending execution of the assignment hold any policy monies
received in trust for the buyer
(d) cancel the policy on completion
5.1.4 Where the property is leasehold and the property, or any building containing it, is insured
by a reversioner or other third party, the seller is to use reasonable efforts to ensure that
the insurance is maintained until completion and if, before completion, the property or
building suffers loss or damage the seller is to assign to the buyer on completion, at the
buyer's expense, such rights as the seller may have in the policy monies, in such form as
the buyer reasonably requires.
5.1.5 If payment under a policy effected by or for the buyer is reduced, because the property is
covered against loss or damage by an insurance policy effected by or on behalf of the
seller, then, unless the seller is obliged to insure the property under condition 5.1.2, the
purchase price is to be abated by the amount of that reduction.
The implications to the buyer
5.1.1 clearly states that responsibility for the insurance of the property is passed to the buyer with effect from the moment contracts are exchanged.
As the obligation is now firmly in the hands of the buyer, the buyer must insure that the property is protected adequately from the exchange date. He should therefore ensure that he has arranged insurance in his own name to cover the building with effect from exchange of contracts.
The obligations of the seller
5.1.2 states that the seller is under no obligation to insure the building from the date of exchange of contracts.
Exceptions
The only circumstances in which the seller is obliged to continue to maintain insurance between exchange and completion are:
a) When the contract of sale has been amended specifically to maintain the obligation to insure the property with the seller.
b) When the seller has an obligation to maintain insurance, such as on a leasehold agreement, tenancy agreement etc, where he has agreed to insure the building under a separate contract.
Advice to the buyer if the seller is obliged to insure the property
If the seller of the building is obliged to insure the property in a) or b) above, the buyer should request evidence of insurance cover and that the policy is in force and paid up to date.
The buyer should not exchange contracts until he has satisfied himself that the building is correctly and adequately insured.
Existing insurance held by the seller
The seller of a property may hold a household insurance policy which automatically provides cover for the benefit of a buyer between exchange and completion of contracts. However, this cover (although the benefit is transferred to the buyer) has been designed for the protection of the seller only in the event that the buyer has failed to insure the property as he is obliged to do. It serves to continue to protect the policyholder by dealing with the transfer of insurable interest to the buyer so that should the buyer fail to insure the property, a claim may still be made to re-instate the property.
It is not designed to be relied upon by the buyer, who is obliged to arrange insurance cover in his own name.
He cannot rely on the seller’s insurance policy for the following reasons:
1) The seller may not have insured the property at all. There is no legal obligation for him to do so.
2) The seller may cancel his policy upon exchange of contracts, having no obligation to continue to insure.
3) The seller’s policy may not be valid – he may have made a mistake on his proposal form, failed to answer questions correctly, or even deliberately mislead the insurer, all of which could void his policy.
4) The seller might not have insured the property for the full replacement value, leading to under-insurance and the potential of a claim shortfall.
5) The seller may have inadvertently failed to adhere to conditions of his policy, causing the cover to be invalid eg If a policy carries a condition to set an alarm system or ensure the property is locked to a certain standard when unattended and this fails to be the case, a claim if the property is broken into and damaged (even burned down) by malicious intruders might fail.
Is there a risk of dual insurance?
There should be no risk of dual insurance when the buyer of a property takes out an insurance policy to protect it, as he is obliged to do, as the provision of cover for the benefit of the buyer on a seller’s home insurance policy is automatically made void by the existence of a policy held by the buyer.
Should a dual insurance position ever arise, the Standard Conditions of Sale (5th Edition) takes account of this in 5.1.5, which reduces the purchase price by any amount by which a buyer’s claim is reduced as a result of the dual insurance being in place.
Advice to the buyer
Unless special provision has been made in the contract which obliges the seller to continue to insure the property, you are responsible for insuring the property from the date of exchange. Ensure that you have arranged insurance on the property from this date, as you cannot rely on the vendor’s policy to protect you.
If the contract does provide for the seller to retain the obligation to insure the property, make sure you obtain evidence that the property is insured adequately (check amounts insured), the terms are being adhered to and that the policy is paid up to date. Do not exchange contracts until you are satisfied.
Advice to the seller
Despite the obligation to insure the property being passed to your buyer from the day contracts are exchanged, you cannot rely on your buyer’s insurance policy and should keep your own policy in force until completion has occurred. Your policy has provision for operating should your buyer fail to insure the property and should therefore remain in force until your legal interest in the property has ceased.