Buying and Selling - When can you and when should you insure?

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27 July 2010

The High Court has considered a case between NFU Mutual Insurance Society Limited ("NFU") and HSBC Insurance (UK) Limited ("HSBC") who respectively provided insurance for the buyer and seller of a property.

After exchange of contracts both policies were in place and there was an extensive fire. The buyer claimed against his NFU policy; was paid out in full and then proceeded to purchase the property with a view to using the insurance proceeds to carry out the necessary repair works. The seller did not claim against HSBC as he had not suffered loss, the property having been sold.  NFU claimed a contribution from HSBC on the basis that there was “double insurance”. This claim was denied by the Court as the HSBC policy contained a provision that they would not pay out if the building was insured under other insurance. There was, in this case, no double insurance.

Double insurance may arise if both parties insure before exchange and completion and if either policy also covers the other party to the sale contract.  For example, a seller’s policy may well cover an uninsured buyer so as to allow the buyer to complete their purchase, thereby protecting the position of the seller.

Such a scenario is viewed as undesirable as one or either policy may be invalidated or the payment under it restricted.

Where double insurance occurs, the insurer who pays out is entitled to require a contribution from the other. Specific policy wording may vary this rule.

Can and should both parties insure? To insure a party must have an insurable interest. In the context of an exchange of contracts, the legal interest in the property remains with the seller, not passing until completion, and the beneficial interest passes to the buyer. Both are insurable interests so both parties can insure.

Having an insurable interest in a property is a different concept to holding the risk in it.

The frequently used Standard Conditions of Sale (4th Ed.) state that the risk in the property remains with the seller but that the seller is under no obligation to insure. The buyer may rescind if severe damage occurs. These standard conditions are often amended to pass the risk to the buyer who then insures against this risk but, even un-amended and with no passing of risk, the buyer is well advised to insure if the seller is not obliged/inclined to do so and limited damage to the property may not allow a buyer to rescind.

The Standard Commercial Property Conditions (2nd Ed.) are more complicated in their approach and must be considered carefully.   In the absence of specific wording in the contract, the seller may be under no obligation to insure.  The buyer should then insure from exchange. 

Although the standard conditions may not oblige a seller to insure, they may be required to do so under the terms of their mortgage, which will not be redeemed until completion; in fulfilment of their obligations as landlord; or if the sale contract is conditional as the beneficial interest will not pass to the buyer who, with no interest in the property, cannot insure.

For further information contact Emma Folkes on 0117 307 6975 or email emma.folkes@burges-salmon.com

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