Dealing with Buildings Insurance in a Conveyancing Transaction

What is buildings insurance?

Buildings insurance is separate to contents insurance, it covers damage to the structure of the property rather than the personal contents within.

The cost of repairing structural damage to your property’s roof, walls, floors, windows as well as permanent fixtures such as built-in kitchens and bathrooms is usually covered by buildings insurance. Also covered either as standard or an optional add-on are garages, sheds and fences and the cost of replacing damaged drains, pipes and cables.

Buildings insurance usually covers damage caused by fire, flood, theft, vandalism, frozen and burst pipes, subsidence and fallen trees etc.

Buildings insurance can be purchased as a standalone policy or as a combined home insurance policy to include contents insurance too.

When does the buyer need to insure the property being purchased?

The buyer is required to insure the property from the point of exchange of contracts therefore they must ensure that a suitable policy has been sourced ahead of exchange.

Exchange of contracts is the point at which the contract becomes legally binding and there is usually, on average, a week between exchange and completion meaning the buyer must insure the property during that period.

Why is the buyer required to insure the property between exchange and completion?

The Standard Conditions of Sale (5^th edition), are incorporated into the majority of residential property contracts for sale, and place an obligation on the buyer to insure the property from the point of exchange.

Clause 5.1.1 of the Standard Conditions of Sale states that upon exchange of contracts it becomes the responsibility of the buyer to insure the property and clause 5.1.2 confirms that the seller has no legal or contractual obligation to insure the property during that period, unless the contract specifically requires the seller to do so.

If the property suffered damage between exchange and completion, the buyer is responsible for the cost of repairs from the moment exchange takes place, therefore the buyer needs to ensure that suitable insurance is in place to cover this risk.

If the buyer is purchasing with a mortgage, their lender will set out their specific requirements in relation to acceptable buildings insurance and one of those requirements will be that the buyer insures the property from exchange of contracts, this not only covers any risk to the buyer, it also covers the risk of the lender not being able to recover the loan amount.

Even if the seller continues to insure the property, the amount insured may not be adequate.

We would recommend that if you are purchasing a property, you obtain quotes for buildings insurance well in advance of exchange so that you are able to arrange for the buildings insurance to start immediately on the day exchange of contracts takes place.

What happens to the seller’s insurance?

Whilst the seller contractually may not be under any obligation to maintain buildings insurance post exchange of contracts, they may choose to do so. If a mortgage is secured against the property, the seller’s lender will require that insurance is maintained until legal completion takes place and the mortgage is discharged.

In most cases, this means that both the seller and the buyer will each have their own buildings insurance covering the same property.

It is common for buildings insurance policies to have a specific clause which states that when you are selling the property, the insurable interest is transferred to the buyer between exchange and completion. This is usually included to protect the seller and this clause is normally voided when the buyer takes out their own policy meaning that the property is then only covered by the buyer’s policy during that period. The seller’s policy will then only serve as a back-up for the seller in the event that the buyer’s policy is inadequate, or the buyer fails to arrange one.

Despite the wording in the contract confirming that there is no legal obligation for the seller to insure the property between exchange and completion, we would strongly recommend that if you are selling a property, you do not cancel the insurance until completion has taken place.

Are there any exceptions?

If the property is leasehold, responsibility for buildings insurance is commonly with the landlord. Under the terms of the lease, it is likely that there will be an obligation for the landlord to insure the property therefore this is something that the buyer would need to check with their conveyancer prior to exchange.

When buying a newbuild property, the standard conditions of sale may be varied to dictate that the seller is to retain the risk until completion takes place, again this is something that should be discussed with your conveyancer prior to exchange.

If you are looking for assistance with a conveyancing transaction, please do not hesitate to contact our residential conveyancing solicitors, we would be happy to help.