What Property Buyers Need to Know About the Contract for Sale #41: How do I verify property insurance requirements?
Introduction
Verifying property insurance requirements is an essential part of any property transaction in New South Wales (NSW). Property insurance protects buyers, sellers, and lenders against various risks, such as damage, theft, liability, and natural disasters. Ensuring that the right insurance coverage is in place helps to safeguard investments, comply with legal and lender obligations, and prevent financial losses. This section outlines the steps to verify property insurance requirements, the types of insurance needed, and how to ensure compliance with relevant regulations in NSW.
Types of Property Insurance Required in NSW
- Building Insurance: Covers damage to the physical structure of the property, including walls, roof, fixtures, and fittings, caused by events such as fire, storms, floods, or vandalism. Building insurance is typically required by lenders for mortgaged properties.
- Contents Insurance: Protects the property’s contents, such as furniture, appliances, and personal belongings, against risks like theft, fire, or water damage. Contents insurance is generally optional but recommended for homeowners and landlords.
- Landlord Insurance: Specifically designed for rental properties, landlord insurance covers risks such as tenant damage, loss of rental income, and liability claims. It may also include building and contents coverage.
- Public Liability Insurance: Provides coverage against claims of injury or damage to third parties on the property. This insurance is particularly important for landlords, commercial property owners, and owners of shared properties.
- Strata Insurance: For properties within a strata scheme, the owners’ corporation must hold strata insurance to cover common property, building structure, and public liability. Individual unit owners may need additional insurance to cover their contents or improvements.
- Mortgage Insurance: Lenders mortgage insurance (LMI) is required by lenders when the borrower’s deposit is less than 20% of the property’s value. LMI protects the lender in case the borrower defaults on the loan.
Steps to Verify Property Insurance Requirements in NSW
To verify property insurance requirements effectively, property owners and prospective buyers should consider the following steps:
- Review the Contract of Sale: Examine the contract of sale to determine any specific insurance requirements, such as mandatory building insurance or landlord insurance. Ensure that you understand the insurance obligations outlined in the contract.
- Check Lender Requirements: If you are financing the property purchase with a mortgage, confirm the insurance requirements with your lender. Most lenders require proof of building insurance coverage before settlement.
- Obtain a Current Insurance Policy: Request a copy of the existing insurance policy from the seller or the property manager (for rental properties) to verify that adequate coverage is in place. Review the policy to ensure it covers all necessary risks and complies with any contractual or legal obligations.
- Conduct a Building Inspection: Arrange for a professional building inspection to assess the property’s condition and identify any risks that may impact insurance coverage. Certain issues, such as structural damage or pest infestations, could affect your ability to obtain adequate insurance.
- Consult with an Insurance Broker: Engage an insurance broker or advisor to help you understand your insurance needs, obtain quotes, and ensure that the coverage aligns with lender requirements and your personal risk profile.
- Verify Strata Insurance for Strata Properties: If purchasing a property within a strata scheme, confirm that the owners' corporation holds sufficient strata insurance to cover the building structure, common property, and public liability. Request a certificate of currency or a copy of the insurance policy.
- Ensure Coverage for Settlement Date: Arrange for building insurance to commence from the date of exchange of contracts, not the settlement date. This protects against risks that may arise before the property legally changes ownership.
- Confirm Public Liability Coverage: Verify that the property has adequate public liability insurance, particularly if it will be used for commercial purposes or as a rental property. This protects against potential liability claims from third parties.
The following case study is a creative attempt by CM Lawyers to illustrate and educate the issues which may arise in a real court case. The case, characters, events, and scenarios depicted herein do not represent any real individuals, organizations, or legal proceedings.
Case Study: Verifying Property Insurance Requirements in NSW – An Unforeseen Risk
Case Overview
In the case of Murphy v. Greene Insurance Brokers [2023] NSWSC 187, a property buyer faced significant financial loss due to inadequate property insurance coverage. Ms. Murphy purchased a heritage-listed property in the Hunter Valley, unaware that the existing insurance policy excluded coverage for flood damage.
Behaviour of the Participants
Ms. Murphy relied on the seller’s assurances that the property was adequately insured and did not independently verify the insurance policy details. Shortly after the purchase, the property was severely damaged by a flood. When Ms. Murphy attempted to file a claim, she discovered that the existing insurance policy did not cover flood damage due to the property's location in a high-risk flood zone.
Ms. Murphy contested the broker’s failure to adequately advise her on the insurance requirements and coverage gaps. She sought compensation for the uninsured losses and damages from Greene Insurance Brokers.
Legal Process and Court Involvement
The case was brought before the NSW Supreme Court. Ms. Murphy argued that Greene Insurance Brokers had breached their duty to provide clear advice on the property’s insurance requirements, especially considering the high flood risk. The court found in favor of Ms. Murphy, ruling that the broker had failed to exercise due care and diligence in advising their client.
The court ordered Greene Insurance Brokers to compensate Ms. Murphy for the full amount of her uninsured losses, amounting to $200,000, plus legal fees.
Financial Consequences
Ms. Murphy’s failure to verify the property’s insurance coverage resulted in substantial financial consequences. While she successfully recovered compensation through legal action, she incurred significant legal fees of $30,000 and experienced delays in property repairs, affecting her plans to lease the property.
Statistics
- Lender Insurance Requirements: Approximately 95% of lenders in NSW require proof of building insurance coverage before settlement.
- Common Gaps in Insurance Coverage: The most common gaps in property insurance coverage in NSW include exclusions for flood damage (30%), tenant damage (25%), and public liability claims (20%).
- Frequency of Insurance Disputes: Around 8% of property transactions in NSW involve disputes related to inadequate or inappropriate insurance coverage.
- Cost of Building Insurance: The average cost of building insurance in NSW ranges from $800 to $2,500 per year, depending on the property's size, location, and risk factors.
- Importance of Insurance Brokers: Approximately 60% of property buyers in NSW use an insurance broker to navigate insurance requirements and obtain adequate coverage.
- Strata Insurance Coverage: About 85% of strata schemes in NSW hold sufficient insurance to cover building structure and common property, but individual unit owners may still need additional coverage.
- Impact on Property Transactions: Properties with inadequate insurance coverage may face delays in settlement, increased costs, or reduced buyer interest.
References
- NSW Fair Trading – Property Insurance Information
URL: https://www.fairtrading.nsw.gov.au/housing-and-property/buying-and-selling-property/insurance
NSW Fair Trading provides information on property insurance requirements, types of coverage, and consumer rights in property transactions.
- Insurance Council of Australia – Property Insurance Guide
URL: https://www.insurancecouncil.com.au
The Insurance Council of Australia offers resources on property insurance, including types of coverage, choosing an insurer, and understanding policy exclusions.
- NSW Strata Community Association – Strata Insurance Requirements
URL: https://nsw.strata.community/strata-insurance
The Strata Community Association provides guidance on insurance requirements for strata properties, including the responsibilities of the owners' corporation and individual owners.
- Australian Securities and Investments Commission (ASIC) – Insurance Obligations
URL: https://www.moneysmart.gov.au/insurance
ASIC’s MoneySmart website offers consumer advice on property insurance, including understanding policy terms, exclusions, and comparing insurance products.
- NSW Law Reform Commission – Property Law and Insurance Compliance
URL: https://www.lawreform.justice.nsw.gov.au
The NSW Law Reform Commission provides updates on property law reforms, including insurance requirements and compliance issues.
Non-Profit Organisations
- Justice Connect – Legal Help for Insurance Disputes
URL: https://justiceconnect.org.au/resources/insurance-disputes
Justice Connect offers legal resources and support for individuals facing disputes over property insurance coverage or broker negligence.
- Law Society of New South Wales – Property Insurance Guidance
URL: https://www.lawsociety.com.au/legal-help/property-law
The Law Society provides access to qualified solicitors who specialize in property law, including insurance requirements and dispute resolution.
- Tenants’ Union of NSW – Information on Property Insurance
URL: https://www.tenants.org.au
The Tenants' Union offers guidance on property insurance and its impact on tenants and landlords, including advice on understanding rights and obligations.
- Australian Pro Bono Centre – Free Legal Resources for Insurance Issues
URL: https://www.probonocentre.org.au
The Australian Pro Bono Centre provides information on accessing free legal assistance for insurance disputes and related property issues.
- Community Legal Centres NSW – Support for Property Owners and Insurance Compliance
URL: https://www.clcnsw.org.au/legal-help/property-insurance
Community Legal Centres NSW offers free legal advice and support for property owners dealing with insurance requirements and compliance issues.