Why buyers need buildings insurance before exchanging contracts

If you forget to arrange buildings insurance when you exchange contracts, this could have disastrous consequences. Find out why.

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Burned down house

What is buildings insurance?

Buildings insurance (not to be confused with contents insurance) covers damage to the structure of a property, and sometimes damage to outdoor structures such as sheds or greenhouses, fences and gates.

This damage could be caused by theft, fire, frozen pipes, vandalism and more. Other elements including fitted kitchens, doors, windows and bathroom suites may also be covered.

When does the buildings insurance become the buyer’s responsibility?

The responsibility for insuring the property between exchange and completion is a grey area. However, the seller’s buildings insurance policy will be unlikely to cover you after contracts have exchanged. It is, therefore, standard practice for the buyer to ensure that buildings insurance is in place on the property at the point of exchange.

Exchange of contracts is the point in the conveyancing process when the sale agreement becomes legally binding.

In some circumstances, exchange and completion happen simultaneously. More often there is a gap of a week or two while the necessary funds are drawn down and various practicalities are ironed out.

What if I don't arrange insurance at the point of exchange?

The 'Standard Conditions of Sale (5th Edition)' is the most common contract of sale used by conveyancing solicitors.

Clause 5.1.1 states that:

"... responsibility for the insurance of the property is passed to the buyer with effect from the moment contracts are exchanged."

If you are taking out a mortgage on your new home, your lender will also require you to have buildings insurance in place at the point of exchange.

If, for example, the house burns down between exchange and completion, the insurance policy will ensure that the property can be rebuilt.

If something happens to the property between exchange and completion, the mortgage lender’s equity is not protected without insurance.

The Law Society’s wording on standard conveyancing practice states that, under most circumstances, ‘The property is at the risk of the buyer from the date of the contract (exchange).’

What about leasehold properties?

If you are buying a leasehold property:

  • The landlord will usually provide the buildings insurance until completion, then the buyer will reimburse the landlord.
  • Your solicitor will check the lease to confirm that buildings insurance will be covered by the landlord until completion.

What if I am buying 'off-plan'?

If you are buying a new build off-plan property (a scenario in which contracts are exchanged before the home has been built), the period between exchange and completion can be months or even years.

In this case:

  • The seller will usually be responsible for buildings insurance until completion.
  • Your conveyancing solicitor will need to read the contract carefully to make sure this is the case; if buildings insurance between exchange and completion is not mentioned, you may be responsible.

Will any buildings insurance policy do?

No. In fact every year thousands of people take out policies that are unsuitable.

When the unthinkable happens, unwitting buyers can then find themselves without a suitable policy and consequently without cover.

Why does this happen?

Conveyancing solicitors are sometimes partly responsible. Sometimes buyers are only made aware that they need to arrange cover just before or sometimes at the point of exchange.

In a state of mild panic, most buyers then buy a buildings policy in haste - typically online or via a comparison site

Comparison sites do not cater for or make it clear that the chosen policy may not cover the period between exchange and completion. This may be explicit in the policy terms, but, in the flurry of activity around exchange, most buyers will not read the small print.

You should ask your solicitor if they know of a suitable policy before you exchange. Alternatively, choose a specialist product such as 'Exchange2completion'.

In summary…

  • For freehold properties, assume that buildings insurance between exchange and completion is your responsibility.
  • Make sure you obtain a policy that covers the period between exchange and completion.
  • Your conveyancing solicitor can advise you on any grey areas.
  • If you are taking out a mortgage, failing to arrange buildings insurance for this period could put you in breach of the mortgage conditions.

Your next step

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Gaynor Haliday, Legal researcher

Author:
Gaynor Haliday, Legal researcher