Buying a property — are you insured?

When buying land with a building or other improvements on the land, a purchaser will often seek advice from their solicitor in relation to their rights and obligations under the contract.

However, purchasers may not be aware when risk passes in relation to the property — it could be much sooner than they think!

Common misconception
When purchasing a property, the basic conveyancing process is relatively straight forward. You firstly exchange contracts, which creates the legal commitment that you will proceed to purchase the property, and then you will complete the contract within the time stipulated in the contract.

It is often misunderstood that because the purchaser is only entitled to take possession of the property when the contract is completed, the seller bears the risk in relation to damage to the property until completion.

When does risk actually pass?
Although a seller has an obligation to take reasonable care of the property until completion of the contract, risk in relation to damage to the property actually passes to the purchaser at the time contracts are exchanged.

Although this is the position in the ACT, in NSW it has been specifically legislated that risk in relation to damage to the property remains with the seller until the earlier of completion, or when the purchaser takes possession of the property.

Therefore, if you are purchasing a property in the ACT it is essential that you are aware of risk passing at the time of exchange, and that you take adequate precaution to protect yourself from this risk, such as insuring the property from exchange.

What if I forgot to insure the property?
In the ACT a failure to insure the property from the time of exchange would expose the purchaser to the risk of the cost of any damage to the property. However, there is some protection available.

Where a purchaser has entered into a contract to purchase a property and the seller has a current insurance policy in place which covers damage to the property, then the purchaser is deemed to be insured under that policy until the earlier of:

  • completion of the purchase
  • the purchaser taking possession of the property
  • the purchaser taking out their own insurance policy or
  • the contract being terminated.

Therefore, provided that the seller has a current, valid insurance policy in place, then the purchaser may be entitled to the benefit of that insurance.

So I don’t have to take out insurance until completion then?
No. In a situation where risk has passed to you as the purchaser, you should always take out your own insurance policy which covers your loss if the property is damaged. Although the abovementioned protection exists, if the seller doesn’t have insurance or if their insurance is void, then you will find yourself in a situation where you may be forced to complete the purchase and rectify the damage to the property, at your own expense.

So what should I do?
When purchasing a property in NSW you can rely on your legislated protections from the risk of damage to the property up until completion. However, in the ACT as you assume risk from the time of exchange, you must always take out insurance to protect yourself.

For more information contact the Commercial, Property and Finance Team:

Christine Murray | Partner
(02) 6279 4444