The risk of damage to property passes to the buyer on exchange of contracts, unless the parties specifically agree that the seller will retain the risk until completion. Where the risk passes on exchange, the buyer will have no claim on the seller’s insurance policy for any physical damage that occurs before completion (Rayner v Preston (1881) LR 18 Ch D 1), and will be liable to pay the full purchase price on the date fixed for completion: Poole v Adams (1864) 10 LT 287.
Consequently, buyers often take out their own insurance to cover potential physical damage after contracts are exchanged. However, sellers usually keep their own insurance on foot in the period between exchange and completion, not least because they still own the property and run the risk that the buyer may be unable or unwilling to complete, giving rise to a duplication of insurance.
Double insurance creates legal and practical difficulties. It often leads to disputes in cases where an insurer seeks to limit the amount that it is required to pay or to recover a contribution from its co-insurer. Consequently, practitioners will be interested in the decision in National Farmers Union Mutual Insurance Society Ltd v HSBC Insurance (UK) Ltd [2010] EWHC 773 (Comm); [2010] PLSCS 111.
The High Court was asked to consider the effect of the insurance policies effected by the buyer and the seller in respect of a property known as the Old Hall in Langham,
The seller’s policy included a provision that extended the insurance cover for the benefit of a buyer in respect of any period between exchange of contracts and completion but only if the buyer was uninsured. The judge ruled that that extension was for the benefit of the seller. The seller’s insurance company had no commercial reason to confer a benefit a buyer that was not its original insured and one that paid it no premium and who enjoyed the benefits of cover from another. Neither would it want to provide the buyer’s insurer with the benefits that would accrue in the event of double insurance. Consequently, if the buyer had its own buildings insurance covering equivalent risks, there would be no good reason for the seller’s insurance policy to be extended for the benefit of the buyer.
The buyer had purchased insurance from another insurer that covered the same risks as those in the seller’s policy. This triggered the exclusion in the seller’s policy, whereby its insurance did not extend to the buyer. Therefore, this was not a case of double insurance. As a result, the buyer’s insurance company was liable under its policy for the full extent of the damage and was not entitled to a contribution from the seller’s insurers.
Allyson Colby is a property law consultant
