A Guide to Buildings Insurance between Exchange of Contracts and Completion
This guide explains why you need insurance, what you need to do under the Standard Conditions of Sale (5th Edition) and under what circumstances you might not require cover. Gaddes Noble Property Lawyers would liketo ensure that residential property purchasers do not fail to arrange suitable buildings insurance during the conveyancing process.
The Standard Conditions of Sale (5th Edition) is the recommended and the most widely used conveyancing contract by Conveyancers and Solicitors operating in England and Wales. It has been used for many years, but our buyer clients are often surprised to learn from our Licensed Conveyancers that they must insure the property from exchange of contracts, usually when the sellers are still in occupation.
Buyers should beware of opting for the cheapest online quotation for insurance which may be unsuitable for the period before completion and which could be voided in the event of a claim, leaving buyers and sellers exposed to potential financial loss. We recommend that a bespoke insurance policy be obtained to insure the property between exchange and completion, ensuring the right protection is provided during this important period.
The buyer’s and seller’s obligations
Clause 5.1.1 of The Standard Conditions of Sale (5thEdition) states that responsibility for the insurance of the property is passed to the buyer with effect from the moment contracts are exchanged.
A buyer’s solicitor must ensure that the buyer has placed in force a valid insurance policy from the moment of exchange of contracts (Unless listed under exceptions below)
Clause 5.1.2 states that the seller is under no obligation to insure the building from the date of exchange of contracts. They are at liberty to cancel their own policy from the date of exchange (however, we would not recommend that they do this).
The only circumstances in which the seller is obliged to continue to maintain insurance between exchange and completion are:
- When the contract of sale has been amended, specifically to state that the obligation to maintain insurance stays with the seller upon exchange of contracts.
- When the seller has an obligation to maintain insurance under a separate agreement, for example under the terms of a tenancy agreement or under the terms of a lease.
Existing insurance held by the seller
Some insurance policies contain a clause extending the benefit of cover to the buyer between exchange of contracts and completion. However, this cover is only intended for the protection of the seller if the buyer has failed to insure the property. It is not designed to protect the buyer who should organise their own insurance policy
A buyer cannot rely on the seller’s insurance policy between exchange and completion for the following reasons:
- The seller may not have insured the property at all.
- The seller may cancel the insurance policy upon exchange of contracts, as there is no contractual obligation to maintain cover.
- The seller’s policy may not be valid, if for example the seller did not give accurate information when taking out the policy
- The seller might have unintentionally insured the property for less than the full replacement value, leading to under-insurance and the potential of a claim shortfall.
- The seller may have inadvertently failed to adhere to conditions of the policy, causing the cover to be invalid an example of this would be breaching a condition to keep the property secure then leaving a door unlocked which could lead to theft, damage or fire.
Is there a risk of dual insurance?
A question often asked by our clients, but we explain that the cover extension on a seller’s home insurance policy is automatically made void by the existence of a policy held by the buyer. This exclusion is written into the cover extension on almost all policies, ensuring cover is only granted if the purchaser has failed to put insurance in place.
When should a seller cancel their policy?
Despite the obligation to insure the property being passed to the buyer from the day contracts are exchanged, reliance cannot be placed on the buyer’s insurance policy and we always recommend that a seller should keep their policy in force until completion. The existing policy has provision should the buyer fail to insure the property and should therefore remain in force until the seller’s legal interest in the property has ceased and the seller is no longer at any risk. Furthermore, property owner’s and occupier’s liability should be maintained until occupation of the premises has ceased as this would not be covered by a buyer’s policy.