This is the first in a series of articles on insurance issues that property owners must contend with.
After a purchaser of residential property has signed a sale and purchase contract and has had their offer accepted there is usually a period of a number of weeks where the contract is conditional on the purchaser performing their due diligence investigation on the property via their lawyer and arranging to obtain finance and insurance to complete the purchase. It is not until these conditions are fulfilled or waived that the contract is unconditional and the process of transferring the ownership of the property to purchaser begins.
Obtaining insurance coverage for a property is one of the most important tasks a purchaser should carry out prior to the sale and purchase agreement becoming unconditional. Insurance is often necessary in order for purchasers to obtain finance from financial institutions as lenders require insurance coverage for their security to protect their interest in the event that the property is damaged.
Purchasers quite often have a short period between signing the contract and fulfilling the various conditions attached to the contract such as obtaining insurance and finance. Both the November 2016 Kaikoura earthquake event and 2017 Port Hills fire have again shown the importance of a purchaser arranging to have insurance in place with the appropriate level of coverage as soon as it is practicable to do so. In such an event, insurers often place an embargo on the affected area and take a wait-and-see approach before issuing new policies. This can leave purchasers in limbo even if they have already received offers of insurance but have not got around to taking on a specific policy. Even purchasers who have a policy in place already but are required by their mortgage provider to increase the sum insured (the amount the property is insured for) may be unable to do so in such an event as their insurer will typically be unwilling to increase its risk.
Even if there is no clause added into the contract that specifically makes the contract conditional upon the purchaser obtaining insurance, the fact that mortgage providers require insurance coverage before providing finance to complete the purchase makes it important for a purchaser to obtain insurance. In the event that there is another sudden earthquake and insurers cease issuing policies again for a significant period of time, a purchaser who has not already arranged for insurance coverage from the date of settlement will have to instruct their solicitor to negotiate for an extension to the finance and insurance provisions and risks a vendor refusing to do so and electing to cancel the contract after the due date for the fulfilment of these conditions has passed.
A purchaser who confirms a contract as unconditional before having insurance locked in runs the risk of there being another disaster and then being unable to obtain insurance before the date of settlement. As stated above, this means a purchaser looking to obtain finance via a mortgage on the property in order to obtain funds to complete the purchase will be unable to do so and risks default. Purchasers also need to be careful as mortgage providers often provide “offers” of finance prior to insurance being finalised but this is not quite enough to consider finance locked in and a mortgage provider may retract an offer to provide finance after a natural disaster, particularly if the purchaser has failed to arrange for insurance cover. In the event of a late settlement the purchaser will then be hit with penalty interest for each day that settlement is delayed. If they cannot complete the purchase at all then the consequences are far more serious.