When you are buying your new home, your solicitor should usually advise you to obtain buildings insurance for the property on Exchange of Contracts.
That means that you get a quote, and pay the premium for the insurance as soon as your conveyancing solicitor has confirmed the moment you’ve been waiting for:Exchange of Contracts has taken place.
I've got no keys, so why insure?
But why, you might ask, should you insure a property you don’t yet own, and which is in all likelihood already insured by the seller, the person who currently owns the property?
There are a couple of legal reasons for doing so:.
Firstly, if you are buying a property with the help of a mortgage, it is almost certain it will be a requirement of your new lender that your own buildings insurance is put in place at Exchange of Contracts.
Why is that? Surely if the house burnt down between Exchange and Completion, isn't it the seller's problem, not yours?
Unfortunately this is not the case. You have at Exchange now entered a legally binding agreement to buy the house, and you have to complete come what may. The seller has no obligation to you regarding the state of the property, and so your lender will insist there is insurance in place so that if they pay out their mortgage funds, these are recoverable in the event the property cannot be reinstated.
Secondly, as alluded to above, there has been a change in the Standard Conditions of Sale which form the basis of all Contracts for residential property in England & Wales. The “risk” passes to the Buyer on Exchange of Contracts.
However before 2011 the Seller retained the risk, ie. if the property burnt down it was the seller who must claim on their insurance to reinstate the property or either party could rescind (cancel) the Contract and any deposit returned to the Buyer.
This key change in property law occurred in 2011, apparently to reflect the reality that most buyers took insurance on Exchange of Contracts in any event because the seller was not obliged to maintain their insurance until Completion.
However the effect of this change is to place the real burden and risk on the Buyer - so that the Seller has no obligations (other than potentially in trust law, but this is untested under the new Standard Conditions).
It is now essential for any Buyers to take out insurance to protect their investment from the moment Contracts are Exchanged.
A recent case of bad timing in Brighton
A recent case of an unfortunate family in Brighton highlights the issues this can cause: uninsured flooding
The Callahan family Exchanged Contracts to buy a property, and while the sellers were away, the pipes froze, then flooded the property causing about £50,000 in damage when they thawed out.
The buyers claim they had not been advised by their solicitors to take insurance at the point of Exchange, and so had none to claim against.
The sellers agreed to assign the benefit of the claim against their own insurers to the buyer, but it looks as though the buyers may only recover about half the cost of the damage, and none of the extra costs they have incurred such as rental accommodation while the works have been carried out.
A further note of caution: ...
Even if as a property buyer you do arrange your own insurance at Exchange of Contracts, you should make sure any relevant information is given to your insurer when agreeing cover.
For example, if the property you are buying is unoccupied, you must ensure the insurer is aware of this, as most standard policies do not pay out on properties unoccupied for over 30 days.
There have been cases in the past where both the seller's and the buyer's insurers have refused to pay out on a claim for flood damage after pipes froze and then thawed causing flooding, because the property had been unoccupied for many weeks, the seller had not drained down the system, and neither party had told their insurers until attempting to claim.
Our advice to home buyers
So the moral of the story for property buyers is simple: arrange proper buildings insurance, suitable to the circumstances of the property you are buying, at the point of Exchange.