The significance of an exchange of contracts is that the transaction will become legally binding. Accordingly the seller will be bound to sell the property specified in the contract for a specified price and the transaction should complete on the given completion date. The very reason that parties attach so much importance to exchange is that it provides people with certainty, in most respects anyway.
In the 5th Edition of the Standard Conditions of Sale, the risk attached to the property shall pass to the buyer on exchange of contracts. This means that when acting for a buyer you should be advising them to have their buildings insurance in place from exchange of contracts. Certainly most lenders will insist on this. The reason for this is that if something were to happen to the property after exchange but before completion, they will have recourse to insurance to mitigate any loss they may sustain whilst not breaching the contract. However, often a buyer is insuring the property without having detailed knowledge of the property or indeed any control over the asset they are protecting.
Certainly most seller clients would be wise to continue insuring the property until completion notwithstanding that the buyer should be arranging their own insurance. From a seller’s perspective, whilst the property may destroyed and it is theoretically at the buyer’s risk, what happens if the buyer then refuses to complete and defaults on the contract? The seller may have a claim for damages arising from the breach of contract but a recovery of the total loss is unlikely. Therefore it is sensible for the seller to continue insuring the property until completion.
This leaves us with a scenario of double insurance and a sense of uncertainty that seems in contradiction to the sense of certainty that many associate with an exchange of contracts. In contrast, insurance arrangements on new build properties tend to make a lot of sense where the developer will insure until completion.
Whilst I acknowledge that the Law Society are unlikely to take my personal view on board; it was Gandhi that suggested we be the change we wanted to see in the world and very little is likely to happen if I keep this to myself. So with that in mind, why not allow the seller to continue insuring the property until completion. However, perhaps amend the policy by putting it into the joint names of seller and buyer whilst noting the interest of any mortgagee as an interested party. To follow the example above, in the event of damage/destruction to the property, either the buyer or the seller could make a claim. Naturally an obligation would have to be put in the contract to require each party to observe the terms of the insurance policy. I suspect the flaw in this alternative will be the willingness of insurers to co-operate promptly with the parties, however is this not something that we grapple with already? Whilst currently unrefined, such co-operation between the parties would be a better option than the present arrangement. Each of us have an obligation to try and improve the industry that we work in; to make it better for our clients and the people who rely on us and with this in mind I welcome your ideas.