When should a buyer insure?

The short answer to this question is “Immediately and always”. The standard REIQ residential contract provides in condition 8.1 that: “The Property is at the Buyer’s risk from 5pm on the first Business Day after the Contract Date.”

The Insurance Contracts Act 1984 (Cth) deems the buyer to be insured under the seller’s home insurance policy in many cases. The buyer is deemed to be insured up until settlement or when the buyer enters into possession, whichever is earlier (note: There is some legal controversy over the practical interpretation of this Act).

However, there is no contractual duty on a seller to maintain or renew any insurance up to settlement. The seller might not even have insurance. Even if the seller does have insurance, a buyer cannot be sure of the adequacy or validity of the policy.

What if the buyer does not take out their own insurance and the property is destroyed or damaged prior to settlement? Where a house is “destroyed by firestorm or tempest so as to be unfit for occupation”, the Property Law Act 1974 (Qld) states that the buyer may terminate the contract before completion or possession. But this only applies in the most extreme cases and it leaves open the possibility of an argument as to whether the extent of damage is sufficient to constitute “destruction so as to the unfit for occupation”.

The buyer has no termination rights if the house is destroyed by other means (e.g. a truck crashes through the house) or if it is damaged. In such a case the buyer must still settle on the due date whether or not the property has been repaired. If the buyer has omitted to take out house insurance, the buyer could claim under the seller’s policy only if the seller is properly insured and only if the provisions of the Insurance Contracts Act can be made to apply.

The buyer may, in the worst case, be left with a substantial repair bill for the damage to the property over and above the purchase price. For all these reasons our advice to buyers is always to take out adequate insurance for the replacement value of the improvements on the property, promptly on signing a purchase contract.

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