Insurance – where does the risk fall after signing a contract?

When a Buyer signs a contract to buy a property… the risk relating to the property is that of the Buyer from 5.00pm on the first business day after the Contract Date. Therefore, the Buyer has to arrange adequate insurance for the property from this time for the full replacement value of the property.

What is the Contract Date? The Contract Date is the date after both Seller and Buyer signed the contract and the real estate agent or the Seller’s lawyer inserted the current date of the last signing party at the top of the first page of the Contract. This is a very important date from which all transaction time frames are calculated.

The risk over the property, for the Buyer, starts at 5.00pm one business day after the Contract Date.
Regardless of the above, the Seller has the responsibility and obligation to take reasonable care of the property until settlement. The Seller should maintain their insurance over the property until their lawyer confirms settlement is completed. There are many circumstances in which the risk will pass back to the Seller even if the contract has gone unconditional which could be catastrophic to the Seller.
The Buyer’s risk to the property is mainly related to major events out of the control of the Seller, such as fire, hail, storms, acts out of the control of the Seller etc.

In addition to replacement value cover the Buyer should ensure they have sufficient public liability insurance included in the policy. This is usually a cheap addition to any insurance policy.
If the property is damaged during the period between the contract date and settlement date, the Seller will usually have the right to require the Buyer to complete the transaction regardless of the damage to the property. In circumstances where the Seller caused the damage and the property is unfit for occupation as a result of the Seller’s actions, the Buyer may have a right to legally withdraw from the sale.

It is always best practice for a seller to:-
1. Ensure they maintain their insurance on the property
2. Take good care of the property until settlement date
3. Hand the property over to the Buyer in a good clean condition on the settlement date.
From the above it appears there will be two insurance policies covering the property, which may seem to be a wasteful spend, but the reality is, legally, the risk over the property has passed to the Buyer one business day after the Contract Date – while the Seller is still in occupation and control of the property, which control and possession unfortunately exposes the seller to an element of personal risk as well.

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