An in depth guide to insurance between exchange and completion

All you need to know about why you need insurance, what you need under the Standard Conditions of Sale (5th Edition) and under what circumstances you might not require cover

Thousands of residential property buyers are failing to arrange suitable buildings insurance during the conveyance process. Timely and accurate advice will ensure they can be protected.

The standard Conditions of Sale (5th Edition) is the recommended and the most widely used conveyancing contract by conveyancing solicitors operating in England and Wales. Although it has been in use for several years, it can still come as a surprise and causes frequent panics with buyers when they are informed by their solicitor that they must insure the property from exchange of contracts, usually when the sellers are still in occupation.

Unfortunately, the increased use of ‘price comparison’ websites by the consumer has led to thousands of policies being purchased which are wholly unsuitable for the period before completion and which can be voided in the event of a claim, leaving buyers and sellers exposed to potentially devastating financial losses.

The buyer’s and seller’s obligations

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 (in all cases other than as detailed below).

A buyer’s solicitor must ensure that the buyer has placed in force a valid insurance policy from the moment of exchange of contracts (Unless listed under exceptions below)

Clause 5.1.2 states that the seller is under no obligation to insure the building from the date of exchange of contracts. They are at liberty to cancel their own policy from the date of exchange (although this is never something we would recommend).

Exceptions

The only circumstances in which the seller is obliged to continue to maintain insurance between exchange and completion are:
a) When the contract of sale has been amended specifically to maintain the obligation to insure the property with the seller.
b) When the seller has an obligation to maintain insurance, such as on a leasehold or tenancy agreement, where he has agreed to insure the building under a separate contract.

If the seller of the building is obliged to insure the property under 5.1.2 a) or b) above, the buyer’s solicitor should request evidence of insurance and that the policy is in force, any terms or warranties are adhered to and the premium is paid up to date. Contracts should not be exchanged until evidence of valid insurance is received.

Why thousands of property buyers are not insuring properly

When a buyer is instructed to effect an insurance policy covering the property he is purchasing, many will look first to the internet. Quote comparison sites can be fantastic tools when the consumer’s requirements are simple and standard. Users tend to put in the information as quickly as possible, select a competitive price from a company they recognise, click through the standard list of questions and proceed to purchase. 

Unfortunately, the buyer’s needs are not standard. What they purchase is often a policy which is invalid from day one, because the ‘standard’ questions which have been asked have not been answered correctly. A pre-requisite of the majority of policies available online is that the property to be insured is the main residence of the proposer and his family and occupied only by them – which it is not. It is also confirmed that the proposer is the owner of the property to be insured, which he is not.

These questions, when they have been answered incorrectly, are enough to void the policy and cause any claims to be declined.

Some buyers may approach their existing insurer and ask them to arrange interim cover on both properties (the one being purchased and the one being sold), which some insurers will offer and some will not. However, even where the holding insurer agrees to extend cover, adequate provision for the circumstances should be confirmed in writing as some insurers have been seen to omit to issue satisfactory documentation confirming the correct cover is in force. Furthermore, this option restricts choice by the consumer, potentially leaving them with a far more expensive policy than they need upon moving in, as a result of having to accept a single insurer’s price and terms instead of finding the best deal.

It must be confirmed that the insurance policy purchased makes provision for occupation (and ownership) by the vendor until contract is completed. Without this provision, the policy may fail.

Existing insurance held by the seller

Many home insurance policies contain a clause extending the benefit of cover to the buyer between exchange and completion. However, this cover is intended for the protection of the seller only, in the event that the buyer has failed to insure the property. It is not designed to be utilised by the buyer, who is obliged to arrange insurance cover in his own name.

  • A buyer cannot rely on the seller’s insurance policy between exchange and completion for the following reasons:
  • The seller may not have insured the property at all. There is no legal obligation for him to do so.
  • The seller may cancel his policy upon exchange of contracts, having no obligation to continue to insure.
  • The seller’s policy may not be valid – he may have made a mistake on his proposal form, failed to answer questions correctly, or even deliberately mislead the insurer, all of which could void his policy.
  • The seller might have unintentionally insured the property for less than the full replacement value, leading to under-insurance and the potential of a claim shortfall.
  • The seller may have inadvertently failed to adhere to conditions of his policy, causing the cover to be invalid eg. A policy has security conditions and the seller has left a window open, leading potentially to a declined claim for theft, malicious damage or worse.

Is there a risk of dual insurance?

Dual insurance is avoided as the cover extension (above) on a seller’s home insurance policy is automatically made void by the existence of a policy held by the buyer. This exclusion is written into the cover extension on almost all policies, ensuring cover is only granted if the purchaser has failed to protect himself.

The right cover is hard to find

The property buyer has the problem of insuring a property, which he does not yet own, but in which he has an insurable interest by virtue of contract and which is occupied by somebody else with no tenancy agreement in force.
Very few home insurance policies make provision for this situation and when purchases are made online, the risks of policies failing to operate are very significant. Even the arrangements offered by insurers with full knowledge of the situation often leave serious questions unanswered with respect to what cover is provided and to whom.

A bespoke product should be used to insure the property between exchange and completion, ensuring the right protection is provided during this critical period. 

Exchange to Completion – The solution recommended by professionals

Exchange2Completion Insurance is a product specifically designed to provide the property buyer with suitable buildings insurance cover for the short period between exchange and completion when the property is occupied by the sellers. This gives the advising professional assurance that the correct cover is in force throughout the contract and leaves the buyer free to choose his own household insurer when completed.

  • Product specifically designed to cover the period between exchange and completion
  • Online purchase with instant documents sent by email
  • Quick and easy to arrange
  • Automatic buildings amount insured up to £1,000,000.00
  • Competitive premiums 
  • Short term cover, giving buyer more choice after completion
  • Underwritten by Royal and Sun Alliance, one of the UK’s most respected insurers

When should a seller cancel their policy?

Despite the obligation to insure the property being passed to the buyer from the day contracts are exchanged, reliance cannot be placed on the buyer’s insurance policy and the seller should keep their policy in force until completion. The existing policy has provision should the buyer fail to insure the property and should therefore remain in force until the seller’s legal interest in the property has ceased and the seller is no longer at any risk. Furthermore, property owner’s and occupier’s liability should be maintained until occupation of the premises has ceased as this would not be covered by a buyer’s policy.

When a client is selling a property, he should be advised to maintain his insurance until contracts have completed

Extract from the Standard Conditions of Sale (5th Edition)

5. RISK, INSURANCE AND OCCUPATION PENDING COMPLETION

5.1.1 The property is at the risk of the buyer from the date of the contract

5.1.2 The seller is under no obligation to the buyer to insure the property unless: (a) the contract provides that a policy effected by or for the seller and insuring the property or any part of it against liability for loss or damage is to continue in force, or (b) the property or any part of it is let on terms under which the seller (whether as landlord or as tenant) is obliged to insure against loss or damage.

5.1.3 If the seller is obliged to insure the property under condition 5.1.2, the seller is to:(a) do everything necessary to maintain the policy(b) permit the buyer to inspect the policy or evidence of its terms(c) if before completion the property suffers loss or damage:(i) pay to the buyer on completion the amount of the policy monies which the seller has received, so far as not applied in repairing or reinstating the property, and(ii) if no final payment has then been received, assign to the buyer, at the buyer’s expense, all rights to claim under the policy in such form as the buyer reasonably requires and pending execution of the assignment hold any policy monies received in trust for the buyer(d) cancel the policy on completion.

5.1.4 Where the property is leasehold and the property, or any building containing it, is insured by a reversioner or other third party, the seller is to use reasonable efforts to ensure that the insurance is maintained until completion and if, before completion, the property or building suffers loss or damage the seller is to assign to the buyer on completion, at the buyer’s expense, such rights as the seller may have in the policy monies, in such form as the buyer reasonably requires.

5.1.5 If payment under a policy effected by or for the buyer is reduced, because the property is covered against loss or damage by an insurance policy effected by or on behalf of the seller, then, unless the seller is obliged to insure the property under condition 5.1.2, the purchase price is to be abated by the amount of that reduction.

Who will I be dealing with?

The Exchange To Completion Insurance policy is arranged by Bickers Insurance Services Limited through a facility managed by Accelerate Underwriting Ltd and underwritten by Royal and Sun Alliance plc.

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