Blog Question: The Transfer of Risk on the Sale of a Home.

Review Character Shows Assess Reviewing Evaluate And ReviewsHi Allan,

I’m hoping you can give me advice.  As you would know, in Queensland, when you sign a contract for a house or land purchase, the property becomes the Buyers Risk, as stated below on the REIQ Contract for House and Residential Land:

8. Rights and Obligations Until Settlement

8.1 Risk The Property is at the Buyer’s risk from 5pm on the first Business Day after the Contract Date.

However, when I approach Real Estate Agents, the topic of insurance is never that important to them.  Would you agree that the Agent or Principle has a Duty of Care to ensure cover on the building is arranged immediately?

Regards

Cory [surname and email provided]

—————–

Thanks for your note. I grew up in Queensland and so I know all about that clause. It has been there since I purchased a house back in the late 1970’s.  Back then it was my advice to friends and what I did myself was just put a line through the clause. No one ever cared when I, or they, did.

The Insurance Contracts Act has now altered the position.  I reproduce an extract from Mannings Six Principles of Insurance, in which I explain how it works under the Act and this may explain somewhat why they do not believe they are at risk. You will see that I use Queensland as my example:

 Section 50 of the Insurance Contracts Act 1984

50    Sale of Insured Property

(1)      Where:

(a)      A person (in this section called the ‘purchaser’) agrees to purchase, or to take an assignment of, property and in consequence the purchaser has, or will have, a right to occupy or use a building;

(b)      The building is the subject matter of a contract of general insurance to which the vendor or assignor under the agreement is a party; and

(c)      The risk in respect of loss of or damage to the building has passed to the purchaser;

         the purchaser shall be deemed to be an insured under the contract of insurance, so far as the contract provides insurance cover in respect of loss of or damage to the building and such of the contents of the building as are being sold or assigned to the purchaser at the same time, during the period commencing on the day on which the risk so passed and ending at whichever of the following times is the earliest:

(d)      The time when the sale or assignment is completed;

(e)      The time when the purchaser enters into possession of the building;

(f)       The time when insurance cover under a contract of insurance effected by the purchaser in respect of the building commences;

(g)      The time when the sale or assignment is terminated.

(2)      A reference in this section to a building includes a reference to a part of a building and also includes a reference to a structure.”

Section 50 of the Act overrides the various States’ legislative attempts, for example the Queensland Property Law Act 1974 (Qld)[1] (as amended), to mitigate the hardship caused to purchasers by the common law approach.

Rather than imposing limitations on the vendor’s application of insurance monies, such as is found in the previously mentioned Queensland Property Law Act 1974 (Qld)[2], the solution adopted by Section 50 is for the purchaser to be deemed an Insured under the vendor’s contract of insurance for a specific period of time. This effectively creates a form of statutory contractual nexus between the purchaser and the vendor’s insurer, which an insurer is unable to avoid, however much it may wish to do so.

The Australian Law Reform Commission recognised that it was contrary to principle to force an insurer to cover a risk they were unable to assess, and to compel it to accept an Insured who might be completely unsatisfactory from a moral hazard point of view. Nevertheless, it concluded that any concern about the purchaser’s fitness as an Insured would be minimised if it were to be given the benefit of the vendor’s insurance for a limited period of time only (that is, from the making of the contract of sale until the completion of the transaction; or entry into possession of the building; or the effecting of cover by the purchaser; or until the sale is terminated). The Commission pointed out that this solution would not affect the desirability of the purchaser arranging its own insurance, for the vendor might have cover that provides inadequate protection for the purchaser, or indeed, might have no cover at all.

Moreover, where a purchaser is deemed an Insured pursuant to Section 50, the insurer can rely upon the same remedies available under the Act[3] with respect to matters such as disclosure, good faith or breach of policy conditions, insofar as the vendor is concerned. In those circumstances, the purchaser may be left with no insurance whatsoever, solely because the vendor’s actions disentitle it to cover.

In summary, Section 50 means a purchaser or assignee of a building and contents who inherits the risk for loss or damage to the property, will be deemed an Insured under any contract of general insurance taken out by the vendor or assignor in relation to the property, for the period commencing upon the date the risk passed to the purchaser/assignee, until the earliest of the following events:

(i)         The completion of the contract.

(i)         The purchaser entering into possession of the property.

(ii)        The commencement of insurance effected by the purchaser.

(iii)       Termination of the sale.

Unlike parts of the Queensland Property Law Act 1974 (Qld)[4], the provisions of Section 50 cannot be excluded, restricted or modified in any way, to the prejudice of the insurer[5], other than in accordance with Section 52(1) of the Insurance Contracts Act 1984 (Cth)[6].

Before moving on, I provide a summary of a few cases involving Section 50. In Lukies v Ripley (1994)[7] the court held:

 Section 50 provides the purchaser is to be deemed an insured under the contract of insurance in so far as the contract provides insurance cover in respect of loss or damage to the building between the contract and completion. It should be noted that the plaintiffs have not sued the GIO as a deemed party to the vendor’s insurance policy even though I threw out that hint to counsel during argument. In such circumstances it seems to me that the only effect on the result of this case that s.50 may bring about is to prevent the insurer asserting its rights of subrogation to compel the vendor to tack action against the purchaser for the full purchase price. As the purchase price has abated under s.66M[8], it would not seem that this would have much effect.”

Application of the Insurance Contracts Act 1984 in respect to Vendor?Purchaser Transactions

In Cusmano v Pinner & Ors (1998)[9] the judge noted that Section 50 did not apply, as the risk had not passed to the purchaser, as was required by Section 50(1)(c)[10].

With this background, it is worthwhile to sum up the Australian law of insurable interest in the context of vendor and purchaser transactions. Parties to contracts for sale can find themselves in a difficult position when loss is suffered post-contract but prior to completion.

For the sake of this review, we will assume the contract is binding and the purchaser wishes to proceed. Any one of three scenarios is likely:

(i)         The vendor has insurance and the purchaser does not.

(ii)        The purchaser has insurance, but the vendor does not.

(iii)       Both the vendor and purchaser have insurance.

Only Vendor has Insurance

In this situation, Section 50 of the Insurance Contracts Act 1984 (Cth)[11] would provide the purchaser with a statutory policy of insurance. However, the statutory insurance provided under Section 50 is no better than the insurance enjoyed by the vendor themselves, so if the policy is struck down by non-disclosure, fraud, or other breach of policy conditions on the part of the vendor, then the purchaser shall also find themselves without cover.

Both parties to the contract are of course entitled to claim under the policy, to the extent of their interest as defined by Sections 16 and 17 of the Insurance Contracts Act 1984 (Cth)[12] (ie. economic interest). Assuming the contract reaches settlement (which is the only reason the purchaser would pursue a statutory claim), then of course the vendor’s interest upon completion would be extinguished.

Only the Purchaser Insures the Property

The purchaser may insure for the full value of the property and recover the full amount of any damage occasioned to it, even though this may be more than the value of his or her own interest, provided that the purchaser intended to insure for the benefit of all persons interested.

Strictly speaking, a purchaser’s insurer is not entitled to delay payment until after completion of the contract, although it can presumably wait until the contract is confirmed as valid and the vendor is able to show good title. If the contract is shown to be invalid or the vendor cannot make title and an insurance claim has already been paid to the purchaser, the insurer could no doubt recover the amount paid over and above any loss suffered by the purchaser.

However, conveyances in Australia typically involve at least a 30 day settlement period, so if the transaction proceeds, completion is usually well and truly effected prior to the claim being adjusted and payment made by the insurer.

Where Both Parties are Insured

As we have already discussed, both parties to the contract have an insurable interest in the insured property prior to settlement.

Let us start with the vendor’s position. Until completion, the vendor retains an insurable interest, at least to the extent of the unpaid sale price. That interest is maintained even if the contract is unconditional, because the purchaser might never carry out the contract[13]. Strictly speaking, in these circumstances the vendor is entitled to pursue a claim for indemnity from their insurer, notwithstanding the existence of an uncompleted contract.

With regard to the purchaser’s interest:

(i)         a purchaser may insure for the full value of the property and recover the full amount of any damage occasioned to it; and

(ii)        a purchaser’s insurer is not entitled to delay payment until after completion of the contract.

Based upon the previously made assumptions of a keen purchaser and a valid contract, and provided there is no delay in settlement, the conventional position is for the purchaser to settle the contract and thereafter claim under their policy. This is arguably the best approach as it avoids complications arising from claim payments initially made to the vendor by their insurer, which subsequently have to be disgorged.

In my experience, where both parties to a transaction are insured and a loss occurs, if the transaction is proceeding, then it is common sense to only claim against the purchaser’s policy. It goes without saying, that Section 50 of the Insurance Contracts Act 1984 (Cth)[14] would have no relevant application where the purchaser has its own insurance[15].

A complication that can arise, but thankfully not often, is where a purchaser has taken out cover but their claim is denied, thereby leaving only the vendor’s policy to claim against.

Based on the wording in Section 50(1)(f), Section 50 would not apply so long as the purchaser’s policy is not void ab initio[16] by reason of fraud or the like. The statutory cover afforded effectively ends at the time of commencement of the insurance cover effected by the purchaser. Therefore, provided that cover exists and has commenced, no statutory cover is available under Section 50 even though the claim is rejected[17].

Matters may be complicated even further when interested third parties are taken into account, but these are outside the scope of this text.

I hope this goes some way to explain things.

Regards

Allan

YellowMannings Six Principles of General Insurance is available here.

[1]     Property Law Act 1974 (Qld), Reprint 10 effective from 26 August 2009.

[2]     Ibid.

[3]     Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73 of 2008.

[4]     Property Law Act 1974 (Qld), Reprint 10 effective from 26 August 2009.

[5]     For a discussion of the relationship between Section 50 and Sections 66K, M and N of the Conveyancing Act 1919 (NSW), see Stephenson v State Bank of NSW, (1996) NSWSC, Court of Appeal, unreported, 7 May 1996.

[6]     Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73 of 2008.

[7]     Lukies v Ripley, (1994) NSWSC, Young J, unreported, 22 June 1994.

[8]     Section 66M of the Conveyancing Act 1919 (NSW).

[9]     Cusmano v Pinner & Ors (1998) Federal Court, Carr J, unreported, 5 August 1998.

[10]    In any event, the judge did not consider the point was material to the case.

[11]    Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73 of 2008.

[12]    Ibid.

[13]    See Kern Corporation v Walter Retrading (1987) 163 CLR 164.

[14]    Insurance Contracts Act 1984 (Cth), Act No. 80 of 1984 taking into account amendments up to Act No. 73 of 2008.

[15]    See Kern Corporation v Walter Retrading (1987) 163 CLR 164.

[16]    Latin meaning ‘from the beginning’.

[17]    Samut R., 2004, “Insurable Interest What Does that Mean to Vendors & Purchasers?”, unpublished paper delivered at the Brisbane Insurance Forum, 12 May 2004.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *


*