Insurance: When Your House Is Under Contract

When to get insurance on a house under contract depends on a few factors, including the location of the property and the terms of the contract. In some states or territories, the buyer is responsible for insurance on the property as soon as the contract is signed and exchanged, while in others, the buyer is only responsible from the settlement date onwards. It's important to review the contract carefully and consult a solicitor or conveyancer to understand your responsibilities and ensure you have adequate insurance in place. Lenders may also have specific requirements for insurance before approving a loan. Ultimately, it's essential to protect your financial interests and get insurance to provide peace of mind during the home-buying process.

Lender requirements for insurance before closing a loan

When it comes to buying a new home, one of the most important steps in the process is securing homeowners insurance. This is particularly crucial if you are taking out a loan to purchase the property. Lenders typically mandate that you have homeowners insurance in place before they will approve your loan. This insurance protects both you and the lender in case of disasters such as fire or flooding. Here are the key things you need to know about lender requirements for insurance before closing a loan:

• Lender requirements: Most lenders will require you to purchase homeowners insurance before they will approve your loan. This is to protect their investment in your home. The amount of insurance they require may vary, but it is typically enough to cover the replacement cost of the home in case of total loss.
• Timing: It is important to start shopping for homeowners insurance as soon as you have an offer accepted on a home. You will typically need to provide proof of insurance to your lender at least three business days before your closing date, but some lenders may require proof of coverage earlier. It is always a good idea to give yourself plenty of time to compare policies and find the right coverage for your needs.
• Coverage requirements: Lenders will usually have specific requirements for your homeowners insurance policy. This may include a mortgagee clause, which protects the lender's rights, and enough coverage to rebuild the home in case of total loss. If your home is in an area prone to natural disasters, such as flooding or earthquakes, your lender may also require you to purchase additional coverage.
• Proof of insurance: Before closing on your loan, your lender will require you to provide proof of insurance. This can typically be in the form of a home insurance binder or your policy declarations page.
• Paying for insurance: In some cases, your lender may require you to pay for a year's worth of homeowners insurance upfront as part of your closing costs. This can be paid through an escrow account, where your lender holds the funds and pays your insurance costs on your behalf.
• Shopping for insurance: When shopping for homeowners insurance, it is important to get quotes from multiple insurance companies to find the best coverage for your needs. You may also be able to get a discount by bundling your home and auto insurance policies or by paying for the full year upfront.

In summary, when taking out a loan to purchase a new home, it is essential to secure homeowners insurance that meets your lender's requirements. This will protect both you and the lender in case of disasters and ensure that you can close on your loan without delay. Be sure to start the process early and carefully review your lender's requirements to ensure you have the necessary coverage in place.

The right level of home insurance for your property

Home insurance is a necessity, not a luxury. It protects your home and possessions against damage or theft. It also covers personal liability for harm to others.

Dwelling coverage

This type of coverage pays to repair or rebuild your house and its attached structures, like a deck, if it is damaged by a problem covered by your policy. Make sure to factor in local construction and materials costs when choosing this coverage. Coverage limits should be updated regularly to reflect changing labor and materials costs.

Other structures coverage

This coverage pays to repair or replace detached structures such as a fence or shed if they are damaged by a problem covered by your policy. Coverage for other structures is usually 10% of your dwelling coverage.

Personal property coverage

Personal property coverage pays to repair or replace your personal belongings, such as furniture, clothes, and electronics, if they are stolen or damaged due to a problem covered by your policy. Most homeowners insurance policies provide coverage for your belongings at about 50% to 70% of the insurance on your dwelling. However, you can adjust this coverage upward if needed.

Liability coverage

Liability coverage pays for accidental injuries and property damage to others. It also covers your legal defense if you are sued because of an accident. A general rule of thumb is to buy enough liability insurance to cover your net worth or what can be taken from you in a lawsuit.

Additional living expenses coverage

This coverage pays for temporary living expenses such as hotel bills and restaurant meals if you can't live in your home due to a problem covered by your policy. Coverage for additional living expenses is typically 20% of your dwelling coverage, but you can increase this coverage if needed.

Medical payments coverage

This coverage helps pay the medical bills of non-family members accidentally injured on your property. It also covers accidents that happen away from your home, like your dog biting someone at the park. Medical payments coverage is usually sold in amounts between $1,000 and $5,000.

Natural disaster coverage

If you live in an area prone to natural disasters such as floods or earthquakes, you will need to purchase additional coverage. Standard homeowners insurance policies usually do not cover damage caused by these events.

Endorsements and add-ons

Depending on your situation, you may need additional coverage that is not included in a standard home insurance policy. This can include home-based business insurance, identity theft insurance, cyber insurance, increased coverage for landscaping, service line coverage, and more.

When determining the right level of home insurance for your property, it is important to review your policy carefully and understand what is and is not covered. It is also a good idea to get quotes from multiple insurance companies and compare coverage options and prices.

The role of solicitors and conveyancers in advising on insurance

In Queensland, Australia, the buyer is responsible for the property from 5 pm the next business day after the contract is signed. In Victoria and New South Wales, the buyer becomes responsible from the settlement date, but it is still recommended to have insurance from the time the contract is signed. In the Australian Capital Territory, South Australia, and Tasmania, the buyer is responsible from the exchange of contracts, so insurance is needed before this date. In Western Australia and the Northern Territory, the buyer is responsible from the date they are given possession or the date the full purchase price is paid, whichever comes first.

Solicitors and conveyancers can also advise on the level of cover needed and the specific risks that should be covered by the policy. For example, if the property is in an area prone to flooding or earthquakes, additional coverage may be needed. They can also help to ensure that the policy meets the requirements of the lender, as most lenders require home insurance before they will provide a loan.

In addition, solicitors and licensed conveyancers are required to have professional indemnity insurance to cover claims made against them by clients or third parties. This became compulsory following the introduction of the Solicitors Act 1974 to protect the public and uphold the reputation of the profession.

The impact of location on insurance requirements

The location of a house can have a significant impact on the insurance requirements and costs for homeowners. Here are some ways in which location influences insurance:

Geographical Area and Risk Factors

The location of a home can affect the likelihood of certain risks, such as natural disasters like floods, earthquakes, or wildfires. If a house is in a floodplain or an area prone to earthquakes, additional coverage for these events may be required or highly recommended. For instance, in the US, homeowners in flood-prone areas may need to purchase separate flood insurance, and those near fault lines should consider earthquake coverage.

Crime Rates and Vandalism

Locations with higher crime rates or frequent incidents of vandalism or theft may result in higher insurance premiums. Insurers review past claims in different areas to predict the likelihood of future losses. Taking proactive steps to improve home security and prevent theft can help lower the chances of making a claim.

Fire Services

The availability and type of fire services in an area can impact insurance rates. Volunteer fire services or longer response times may result in higher premiums because a delayed response could lead to more severe damage in the event of a fire. Additionally, the distance from a fire station and fire hydrant can affect premiums, with closer proximity generally leading to lower rates.

Distance from Water

Proximity to bodies of water that can cause flooding is another factor considered by insurers. The likelihood of flooding can impact eligibility for certain coverages, such as overland water coverage, and may result in higher costs.

Regulatory Differences

Insurance regulations can vary at the provincial or state level, leading to differences in insurance requirements and pricing. More regulated provinces or states may have less flexibility in pricing.

Proximity to Other Buildings

The distance between a house and neighbouring properties can also influence insurance rates. Homes located closer together may be at a higher risk of fire spreading from one property to another.

Age of the Area and Home

Older areas may have inadequate sewage systems, increasing the risk of sewer backup. Additionally, older homes, such as heritage properties, may have outdated wiring and plumbing, increasing the likelihood of fire or flood.

Traffic Patterns

Locations with higher traffic and more intersections, typically highly-populated urban areas, often result in higher auto insurance rates due to an increased chance of collisions.

Local Laws and Requirements

The state or territory in which a house is located can also determine when insurance is required during the home-buying process. For example, in some places, the buyer may be responsible for insurance from the time of signing the contract, while in others, the buyer becomes responsible on the settlement date.

In summary, the location of a house can significantly influence the insurance requirements and costs due to factors such as risk of natural disasters, crime rates, fire services, proximity to water and other buildings, local regulations, and traffic patterns. It is essential for homeowners to understand the specific requirements and considerations for their location to ensure adequate coverage.

Contents insurance for your belongings

Contents insurance covers your household items and personal belongings if they are damaged, lost, or stolen. Contents insurance can be purchased as a standalone policy or as part of a combined home insurance policy.

When choosing contents insurance, consider the value of your belongings. Ask yourself what you could afford to replace or lose if something went wrong. Most contents insurance offers the replacement value of your belongings, sometimes called 'new for old' cover. This type of cover is more expensive but gives you the best cover. Some policies offer the value of your belongings at the time they are insured, which may depreciate over time.

Calculate the value of your belongings by listing all your items and how much it would cost to replace them at today's prices. Include as many details as possible, such as serial numbers, receipts, warranties, photos, condition, and the date of purchase.

Most contents insurance does not include cover for accidental damage, but this can be added if you want cover for mishaps. Check what isn't covered, for example, damage to clothing or computers. Contents insurance covers loss and damage caused by defined or insured events, such as fire, storm, theft, and vandalism.

Check what items aren't covered and decide if you want to add something. For example, portable items like your handbag, glasses, camera, bicycle, mobile phone, tablet, or laptop, or valuable items like jewellery and special collections, such as artwork, stamps, rare books, or memorabilia.

If you rent your home, renters insurance could be a good option. This type of contents insurance is usually cheaper but has more exclusions and limits than regular contents insurance. It may cover accidental damage to the house and legal costs if someone injures themselves on the property.

Most policies have maximum amounts on how much you can claim for certain items. For example, if the limit for electrical appliances is £1000 and a fire destroys your £2000 television, you will have to pay the difference to replace it.

You may pay a lower premium if you bundle your contents insurance with your home insurance, pay annually, or apply online. You could get a discount if you have deadlocks, fire extinguishers, smoke alarms, or a security system.

Some insurers offer extra benefits, such as replacing locks and keys after a break-in or covering your belongings when you move house.

Get quotes from more than one insurer to find the best value and a policy that suits your needs. Compare the Key Fact Sheets of different policies, and if you want more detail, read the product disclosure statement (PDS).

When to Get Insurance on a House Under Contract

The timing of when to get insurance on a house under contract depends on the state or territory in which you live and the specific terms of your contract. In some states, the legislation around this issue is unclear.

In Queensland, Australia, the buyer generally becomes responsible for the property from 5 pm the next business day after both parties have signed the contract. Therefore, it is recommended to have insurance sorted by this time.

In Victoria and New South Wales, the buyer becomes responsible for any damage to the property from the settlement date. However, it is recommended to get insurance from the time the seller signs the contract to be on the safe side.

In South Australia, Tasmania, and the Australian Capital Territory, the buyer becomes responsible for any damage to the property on the exchange of contracts, so insurance should be sorted before this time.

In Western Australia and the Northern Territory, the buyer assumes responsibility at the earliest of two times: the date the buyer is entitled to or given possession, or the date the full purchase price is paid.

Lenders often mandate purchasing homeowners insurance before the loan closes and maintaining coverage for the life of the loan. Most financial institutions will not fund a mortgage without establishing homeowners insurance before closing.

Tips for Choosing the Right Home Insurance

• Prevention is always better than cure. Keep your house safe and secure by regularly checking your fire alarm, locking windows and doors when you're out, and consider installing a security alarm.
• Choosing a higher excess will lower your premium. While paying a higher excess may sound unappealing, it will reduce the cost of your insurance policy.
• Don't be caught out with underinsurance. Lowering how much you're insured for to enjoy cheaper premiums may seem attractive, but if you're underinsured, you might not be adequately covered in the event of a claim.
• You'll also need a plan that's right for your situation. For example, if you live in an area prone to flooding, you'll want cover for that.
• The financial benefit of having home and contents insurance can provide peace of mind and protect your investment.

Frequently asked questions