Exchange of Contracts and Buildings Insurance
Purchasing a property is a significant step in one’s life, and during this process, it’s crucial to safeguard your investment. One aspect that often goes unnoticed is buildings insurance between the exchange of contracts and the completion of the sale. This guide aims to shed light on the importance of insurance during this period, the obligations outlined in the Standard Conditions of Sale (5th Edition), and when exceptions apply. Let’s dive into the intricacies of this critical aspect of property transactions.
Why Insurance Matters
Buying a home is a major financial commitment, and protecting it is paramount. Insurance ensures that your investment is shielded from unforeseen events, such as damage or loss to the property. The Standard Conditions of Sale (5th Edition) serves as the standard conveyancing contract widely used in England and Wales, and it contains provisions regarding insurance during the property transaction.
The Standard Conditions of Sale (5th Edition)
This widely employed conveyancing contract governs property transactions in England and Wales. While it has been in use for many years, some buyers may be surprised to learn that they are responsible for insuring the property from the moment contracts are exchanged, even if the seller continues to occupy the property. Opting for the cheapest online insurance quote may seem tempting, but it could be unsuitable for the period between exchange and completion, potentially voiding the policy in the event of a claim and leaving both parties vulnerable to financial loss. To ensure the right protection during this crucial phase, it’s advisable to obtain a bespoke insurance policy.
Buyer’s and Seller’s Obligations
Clause 5.1.1 of The Standard Conditions of Sale (5th Edition) stipulates that the responsibility for insuring the property shifts to the buyer immediately upon the exchange of contracts. It is the buyer’s solicitor’s responsibility to ensure that a valid insurance policy is in place from the moment of contract exchange, except under certain exceptions.
Clause 5.1.2 states that the seller is not obligated to insure the building from the date of contract exchange. While they have the liberty to cancel their own policy from that date, it is typically not recommended.
Exceptions to the Rule
There are specific circumstances in which the seller must continue to maintain insurance between the exchange and completion:
- Amended Contract: When the sale contract has been modified to specify that the obligation to maintain insurance remains with the seller upon contract exchange.
- Separate Agreements: When the seller has a distinct obligation to maintain insurance per another agreement, such as a tenancy agreement or lease terms.
Seller’s Existing Insurance Policies
Some insurance policies include clauses that extend coverage to the buyer between the exchange and completion. However, this extension is designed to protect the seller if the buyer fails to insure the property and should not be relied upon by the buyer. Relying on the seller’s insurance can be risky due to several potential pitfalls:
- The seller may not have insured the property at all.
- The seller might cancel the insurance policy upon contract exchange as there is no contractual obligation to maintain coverage.
- The seller’s policy may not be valid if inaccurate information was provided during its issuance.
- The property may be under-insured, potentially leading to a claim shortfall.
- The seller may inadvertently breach policy conditions, rendering the coverage invalid.
Risk of Dual Insurance
A common question among clients is whether dual insurance is necessary. However, the extension of coverage on a seller’s home insurance policy is typically voided by the buyer’s insurance policy. This exclusion is standard in most policies, ensuring coverage is granted only if the purchaser fails to secure insurance.
When Should a Seller Cancel Their Policy?
Despite the transfer of the insurance obligation to the buyer from the day of contract exchange, it is not advisable for the seller to cancel their policy until completion. The existing policy provides protection in case the buyer fails to insure the property. It should remain in effect until the seller’s legal interest in the property ceases, and they are no longer exposed to risk. Additionally, property owner’s and occupier’s liability should be maintained until the premises are no longer occupied, as these aspects may not be covered by the buyer’s policy.
In summary, navigating buildings insurance between the exchange of contracts and completion is a vital aspect of property transactions. It safeguards the interests of both buyers and sellers and ensures that the property investment remains protected during this transitional period. To avoid potential disputes and financial risks, it is crucial to understand and adhere to the Standard Conditions of Sale (5th Edition) and to consider obtaining bespoke insurance coverage.
