When Do I Need Insurance? At Contract or Settlement?

I’m currently mentoring a first-time property investor in Steve McKnight’s Millionaire Apprentice program. This gentleman recently immigrated to Australia and is learning the intricacies of the Australian property market.

After clearly establishing his goals and strategy, he decided to search for a property with future subdivision potential in one of Brisbane’s suburbs.

We’ve spoken numerous times over the past two months as he researched different areas, inspected multiple properties, and finally submitted an offer. After a building inspection and some renegotiation, his offer was accepted and the contract went unconditional.

This week he emailed me with a simple, yet important question:

“Should I Take Out Building Insurance Now, or After Settlement?”

Standard contract terms vary from state to state regarding who is legally responsible for damage to a property in the period between signing a contract and settlement.

In Queensland and Victoria, the law seems to favour the vendor, meaning the buyer is responsible to cover any loss after an offer is accepted.

In New South Wales, Western Australia and ACT, the risk does not pass to the buyer until settlement, which assumes the vendor should carry the insurance.

So does the answer to the question depend on where you live? The short answer is “no.”

At the end of the day, whether you’re a buyer or seller, it doesn’t matter where you live or who is legally responsible. The question you should ask yourself is, “Do I have a financial interest in this asset?” If the answer is yes, then you have something to lose, and you should get insurance.

As the Buyer, When Should I Insure My New Investment Property?

As a buyer, from the moment you pay a deposit, you have something to lose.

Even in a state that favours the buyer, you would be foolish to blindly assume that the vendor’s insurance will cover your loss prior to settlement. If the property burns down and the seller lacks sufficient insurance, you could lose your deposit, or worse.

As soon as you have reached an agreement and signed the contract,you should call your insurer to take out a policy for the property.

As the Seller, When Should I Cancel My Insurance?

If you’re the vendor, you have the greatest financial interest in the asset prior to the settlement. After all, you’ve only collected a deposit. To fully cover yourself, you should maintain insurance against your risk of loss until the title has transferred to the buyer.

Even if the contract provides for the buyer to carry the risk prior to settlement, the buyer could fail to hold adequate insurance. In this case, you could be forced to sue the buyer to recover damages. At best, it could take months, or even years to recover your loss.

If both you and the buyer have coverage and the property is damaged, you can let the insurance companies fight over who is responsible.

The Cost Versus the Risk Makes Insurance a No-Brainer

If something goes wrong, the cost of not having insurance far exceeds the expense of carrying it for an additional month or two during the settlement period.

Even if you’re looking at an added expense of several hundred dollars, you’ll protect yourself from a loss of potentially tens, or even hundreds of thousands of dollars.

The level of insurance cover you need will depend on the value of your property, as well as the type of dwelling on the land. Even if the land is vacant, you’ll want to take out public liability cover.

For more on mitigating your risks of loss in real estate check out my article, “7 Types of Insurance Every Property Investor Should Consider.”

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.