Risk and Buildings Insurance Between Exchange and Completion In the Purchase of a Property
Buildings insurance is often an issue during Exchange and Completion in the purchase of a property due to the fact that after contracts are exchanged, both the buyer and the seller have a legal interest in the property. The buyer has to obtain buildings insurance to protect their interest in the property as they are committed to purchasing the property and the seller has to maintain their existing buildings insurance as they live in the property and invariably have to maintain buildings insurance to comply with the terms of their mortgage secured on the property. This means that between exchange and completion there are two insurance policies covering the same property. This is known as Double Insurance.
Double Insurance and the Doctrine of Contribution
Under the doctrine of contribution if there is more than one insurance company insuring a particular risk and only one of the insurers pays out on a claim, the insurer that paid out is entitled to recoup part of their costs from the other insurer or insurers . This has had a negative effect causing most buildings insurance companies to include terms which limit or modify such rules of contribution resulting in policies being restricted or invalidated.
The issue of Double Insurance in property transactions was highlighted recently in the case of National Farmers Union Mutual Insurance Society Ltd (‘NFU’) v HSBC Insurance (UK) Ltd (2010). In this case both the Seller and the Buyer held a buildings insurance policy on the property between Exchange and Completion. After exchange, the property was extensively damaged by fire. The purchase of the property was completed in accordance with the terms of the sale contract. The Buyer claimed under their buildings insurance policy with NFU who paid out in full. NFU then made a claim against HSBC on the basis of Double Insurance and the doctrine of contribution.
HSBC declined to pay on the grounds that their buildings insurance policy did not cover the Buyer due to the fact that the Buyer had taken out their own policy. The terms of HSBC’s policy did state that it covered the Seller and anyone buying the property up to the date of Completion; however within the policy there was also a term that excluded payment if the property was insured under any other buildings insurance policy. This argument was up held by the High Court which ruled in favour of HSBC and went on to make it clear in their judgement that it is the wording of the buildings insurance policy that will determine whether or not the circumstances are such that there is deemed to be ‘Double Insurance’ and in which the doctrine of contribution can apply.
Buildings Insurance : What is the Position in the Contract?
In common law there is no requirement for the seller to maintain buildings insurance on the property from exchange. The property is at the risk of the buyer from the date of Exchange of Contracts and it is for the buyer to put their own insurance policy on risk from the date of exchange. This may be overridden by the terms of the contract. In the Fourth Edition of the Standard Condition of Sale (’the 4th Edition’) the risk was kept with the Seller unless the terms of the contract expressly stated otherwise. In the 5th Edition of the Standard Conditions of Sale (‘the 5th Edition’) , the position is reversed, with the risk and obligation for buildings insurance passes to the buyer. The 4th Edition allowed the buyer to rescind the contract in the event the property was damaged so as to make it unfit for purpose; the 5th Edition makes no such concession and the buyer is compelled to Complete in any event.
There are legitimate reasons for the Seller to continue to maintain buildings insurance on the Property to Completion such as the fact that he is under an obligation to do so under the terms of his existing mortgage and also to protect themselves against circumstances where the buyer fails to Complete. The Buyer is often required to maintain a buildings insurance policy for the Property from exchange, by their lender.
What is the Solution?
One solution would be for the Buyer to ask the seller to add the buyer to their existing buildings insurance policy for the period between Exchange and Completion; or for a completely new joint insurance policy to be taken out to replace the seller’s existing buildings insurance policy for that period.
Another solution would be for a clause being added to the contract to allow the buyer to rescind the contract in the event that the Property is damaged and not fit for habitation. A common provision added to the contract terms is that the risk is with the buyer and in the event of damage to the property, the purchase price is to be reduced by the amount paid out under the buyer’s buildings insurance.
It would seem that there is no clear answer and the period between Exchange and Completion will always be fraught with danger.