Insurance and Passing of Risk

Insurance and Passing of Risk

You have just exchanged Contracts for the sale or purchase of a property – Congratulations!  You are still a few weeks away from settlement though – what happens if the property is damaged or destroyed before then? 

The answer will depend on whether the property is in the ACT or NSW.

When does the risk pass in the ACT?

The ACT standard Contract and legislation are silent on this issue, so as a result we need to look to the common law.  The common law position on the passing of risk continues to apply in the ACT, namely, that upon exchange of Contracts the risk passes to the buyer.

What this means is that the buyer is obliged to pay the whole of the purchase price even if buildings or other improvements on the land are damaged or destroyed after exchange, but before settlement provided it was not the fault of the seller.  For example, if the property burns down, the buyer still needs to pay the full Contract price for the ashes.

Consequently, in the ACT it is of utmost importance that buyers take out insurance cover over the property from the date of exchange.  While it is still recommended that sellers retain their own insurance until settlement, as the buyer has the obligation to still pay the whole price the seller’s insurer may have the right to avoid liability.

When does the risk pass in NSW?

In NSW, though, the situation is different. 

Under the NSW standard Contract, the buyer accepts the state and condition of the property at the date of the Contract (subject to fair wear and tear).  The rule at common law is altered by Section 66K of the Conveyancing Act, which provides that the risk in respect to damage to the land (including the fixtures) shall not pass to the buyer until:

• completion of the sale; or
• earlier, if the buyer moves into the property before settlement.

Under the Contract, the seller is not liable for any damage from fair wear and tear to the property after exchange.  However, the risk of damage to buildings and other fixtures remains with the seller until settlement unless otherwise provided.  Consequently, where property is substantially damaged after exchange, the buyer has the right to end the Contract.

As a result of this, in NSW it is of utmost importance that seller maintains their insurance cover over the property until settlement.

If you have further questions or are uncertain about risk and insurance, please contact me. I am here to help.