Sometimes, especially in cases of purchase of new property it is common for the risk of damage to remain with the seller until construction is completed. And if there is damage to the property between the period of exchange of contract and completion, the buyer can rescind the contract. Thus, the buyer need not take his own insurance on the property, since the risk lies with the seller/builder. However, the contract should exclude provisions of the LPA Section 47 that gives the buyer right to claim from the seller’s insurance policy should there by damage to the property.
Property at buyer’s risk
It is common understanding that the seller is not obligated to insure the property except unless specifically provided in the contract of sale or lease and the risk always passes to the buyer in the event of completion. However, the Fifth Edition of the Standard Conditions takes a contrary view. The following article explains this in detail.
A seller would normally keep his insurance policy until completion thereby leading to a problem of dual insurance. On a claim for damage on dual insurance, the company would reduce the amount to be paid. Thus it is wise that the buyer negotiates a reduction in the purchase price of the property because of the existence of dual insurance policies. This reduction can later be claimed by the seller from his insurance company.
Both, the SC and SCPC predict the possibility that the seller should maintain his insurance. And when such a condition is included in the contract and the damage occurs before completion the seller is required to pay the money received from the claim. This is also applicable if the seller should have insured the property under the terms of a lease. This is applicable when the property that is being sold is subject to a lease or when a freehold property is being sold on lease.
Maintenance of seller’s policy
After the exchange of contract, the seller is free to cancel his insurance policy unless he is expressly barred from doing so under the terms of the contract for sale, lease, or mortgage. However, it does not really make sense for the seller to cancel the contract before completion of contract.
Other types of insurance
Besides covering the risks in the property, it is also important that the buyer covers other risks, for instance life insurance or house content policy (this is not required until the buyer has moved his furniture and other contents into the property). This is because if buyer dies before completion, but after exchange of contract the personal representatives could make use of the proceeds from the life insurance policy to complete the transaction. In the event of the buyer’s death, his lender would naturally revoke the mortgage offer, but his personal representatives can be made to complete the sale. Thus, this money would be of immense help.
However, the buyer’s conveyancing solicitor should be very careful when offering advice on insurance policies. This should be subject to the provisions of the Financial Services and Markets Act 2000.
Photo courtesy: Random_fotos