Before a sale is contemplated, insurance of the property is generally the responsibility of the owner of the property and, in some cases, follows the property. However, where such property is the subject of a lease, the terms of the lease will prescribe which party has responsibility to insure. Whatever the length of the lease, the tenant will generally insure the contents of the property belonging to the tenant and in some cases certain parts of the property for which the tenant is contractually responsible, for example glazing.
The insuring party should have a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The policy may also cover additional special heads of cover such as subsidence, heave, earthquake and, if available, terrorism.
Generally, it is the buildings and not the land, which are insured for the reinstatement cost rather than the reinstatement value.
Insurance policies may either comprise a single policy for one particular property or a block policy designed to cover a portfolio of properties. Larger institutional investors may self-insure.
Occupying owners generally have separate policies to cover the contents of the property, especially if the property includes costly plant and machinery.
In some cases (e.g. policies insuring the seller’s interest to maintain the property), rights under the insurance policy will automatically transfer on sale. However, the policy will expire if the new owner does not confirm to the insurer that the policy should continue within two months after the transfer, while the insurer has a right to terminate. In other cases insurance policies are personal and will not automatically transfer on sale. It is important to check each policy carefully to ascertain the precise position.
Where a sale is taking place, timing of the transfer of risk is normally prescribed by the sale agreement. It is common market practice for the parties to agree that the seller will continue to insure occupied property until completion.
Third party liability risks (e.g. environmental or personal damage) are intrinsic to almost every property. It is important to have third party liability insurance which properly covers these risks.