Insurance - where does the risk fall after signing a contract?

When buying property in Queensland, one of the most critical yet often overlooked aspects is understanding where the risk falls after signing a contract. As a lawyer with over 20 years of experience in property law, I’ve seen many buyers mistakenly believe that they are free from any risk until settlement. However, this is not always the case, and it’s crucial to understand how risk is transferred during a property transaction to ensure you are adequately protected.

When Does the Risk Pass to the Buyer?

Under Queensland law, once a contract for the sale of a property is signed, the risk generally passes to the buyer at 5 pm on the first business day after the contract date, unless otherwise stated. This means that from this point forward, the buyer bears the responsibility for any damage or loss to the property — even though they don’t yet have possession.

This transfer of risk can come as a surprise to many buyers, especially if an unforeseen event such as a fire, flood, or vandalism occurs before settlement. It underscores the importance of securing adequate insurance as soon as the contract is signed to protect your investment.

What Does This Mean for the Seller?

Until the risk passes to the buyer, the seller remains responsible for maintaining the property in its current condition. This includes making necessary repairs and ensuring the property is insured. Once the risk passes, however, the seller is not obligated to compensate the buyer for any damage or loss that occurs, even if the buyer hasn’t taken possession.

The Importance of Insurance for the Buyer

Given that the risk transfers to the buyer early in the process, obtaining insurance as soon as the contract is signed is essential. Many buyers make the mistake of waiting until settlement to arrange for insurance, assuming that because they haven’t moved in, the property is not yet their responsibility. This leaves them vulnerable to significant financial loss if an unexpected event occurs.

At a minimum, buyers should arrange for building insurance to cover potential damage to the structure of the property. In some cases, lenders may also require proof of insurance before approving a loan, adding further urgency to this step.

How Insurance Works During the Conveyancing Process

Once the contract is signed and the buyer obtains insurance, they should inform their insurer that they do not yet have possession of the property. This ensures that the policy covers any damage that occurs before settlement. In most cases, insurers are familiar with this situation and will provide coverage for the period between signing and settlement.

It’s also important to note that while the risk passes to the buyer, the seller typically remains responsible for any deliberate damage or neglect that occurs after the contract is signed. If there is a dispute regarding damage that occurred during this time, the terms of the contract and the insurance policies in place for both parties will come into play.

Exceptions and Negotiated Terms

In some cases, the standard transfer of risk can be altered by negotiation. Buyers and sellers can agree to a different arrangement regarding when the risk passes, and this should be clearly outlined in the contract. For instance, the contract may specify that the risk remains with the seller until settlement, giving the buyer peace of mind during the transition period.

What to Do if Damage Occurs

If the property is damaged between the time the contract is signed and settlement, it’s critical to act quickly. The first step is to notify your solicitor and insurer immediately. Your solicitor will review the contract to determine who is liable for the damage, and your insurer will advise on whether the policy covers the loss.

If the damage is significant, the buyer may have the option to terminate the contract or negotiate with the seller for repairs or a reduction in the purchase price. Your solicitor can guide you through these options and help you take the appropriate steps to protect your interests.

Final Thoughts

Understanding when the risk passes after signing a property contract is crucial to protecting yourself as a buyer. In Queensland, the responsibility for the property shifts to the buyer surprisingly early, so it’s essential to secure adequate insurance as soon as the contract is signed.

As I’ve seen throughout my career, failing to arrange for timely insurance can lead to costly consequences that could have been avoided with proper planning. In future blog articles, I’ll explore related topics, such as what to do if you discover damage after settlement and how to ensure your insurance coverage aligns with your lender’s requirements.

For more insights on this topic, feel free to check out our previous blog on Insurance: Where Does the Risk Fall After Signing a Contract?, where we dive deeper into these issues.v