Exchanged contracts? Get insurance!

by Chris Lang on November 8, 2012

House on fire

When your offer has been accepted and the contracts have been exchanged, it is so tempting to finally relax. You deserve it – you’ve worked hard, searched and found the right house, negotiated a great price and feel kind of proud of yourself and exhausted at the same time.

Sorry, the celebration will have to wait, you still have one more crucial thing to do:

The house must be insured. But hang on, you say, I don’t even own it yet! Correct, you will own it after settlement but in the meanwhile you should still insure it and here is why. There is the issue of the risk of damage to the building and its fixtures. At any time after the exchange of contracts the house is either at the buyer’s risk or at the vendor’s. The best thing is to explicitly clarify that in the contract and set a date when the risk passes from the vendor to the buyer.

What you need to know about the risk of damage is the minute it passes to you, the buyer, you must already have insurance. To stay on the safe side, it is better to get the house insured even before. Consider a worst case scenario where the house burns down one day after you’ve exchanged contracts and the vendor doesn’t have insurance or his insurance is covering only part of the rebuilding costs.

If that happens, a buyer may still be forced to proceed with settlement, becoming a proud owner of a pile of burnt junk. At this point if he had the house insured, it wouldn’t be a tragedy – the house would have been rebuilt at the insurance company’s expense. All of this could have been even turned in his favor, because instead of an old house he would be getting a new one for the same money.

Getting insurance for your home is not an easy task, as there are many issues to consider such as what the policy should cover, how to choose the insurance company and more. One of my next posts will be discussing home insurance policies in more detail, stay tuned or better yet, subscribed.

Update: please note that different states have different insurance requirements. This article is referring to Victoria and QLD. In NSW, ACT and WA home owner is required to have insurance at settlement.

{ 3 comments… read them below or add one }

Leon Cupit August 13, 2009 at 11:43 am

One Of The Incredibly Dumb And Stupid Mistakes Smart People Make When Buying A Home

I can relate to that, below is a classic example of what can happen if you don’t take this advice.

Failing to take out adequate insurance after signing the contract.
This is a much neglected area that does need your attention. When you sign a contract to purchase a property you are deemed to have an interest in the property.

At this point you have no idea if the seller has adequate insurance or if they have any insurance at all. I strongly recommend you get professional advice to confirm the replacement cost of the house and this should be your starting point. It is not wise to insure for the purchase price only as this will often leave you under insured.

Horror Story – Peter brought his dream home subject to receiving finance within 21 days, Peter was advised to take out insurance immediately but he decided to wait until his finance was approved and the contract was unconditional.

Unbeknown to Peter the seller had not renewed his house insurance that ran out last month, thinking that why should he renew the insurance if he was selling it.

7 days after Peters offer was accepted the heavens opened up and it rained heavily for three days.

Peters dream home suffered massive water damage not only from the flooding but also from leaking roofing. Peters finance has since been approved and the contract is now unconditional. Peter was not told about the water damage until after the finance approval. The water damage repair and cleanup bill is estimated to be over $35,000. Now the argument is “who’s going to pay” and the lawyers are fighting it out.

A simple $250 insurance policy is all that was needed to avoid this disaster. (by the way, the lawyers charge upwards of $285 per hour)


Catherine Davies November 9, 2012 at 2:31 pm

Dear Home I Own,

Before you scare the pants off all your buyers, it probably doesn’t hurt to clarify that different States in Australia have different insurance requirements. QLD does require a purchaser to insurance the property from the date of the contract but NSW has different legislation and the risk of the property passes to the purchaser only on possession or settlement.


Chris November 9, 2012 at 2:52 pm

Hi Catherine – thank you for the comment, the article was amended to remind readers of different insurance requirements in different States.


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