Building Insurance and Settlement Day Risk

"Risk" in a property contract refers to who bears the financial consequences if the property is damaged or destroyed, by fire, storm or another insured event, between the contract being signed and settlement taking place. It sounds like an unlikely scenario, but it happens often enough, particularly with storm and bushfire damage, that every state's standard contract of sale deals with it explicitly. Understanding when risk passes, and making sure your own insurance is in place well before it does, is one of the more overlooked parts of a straightforward residential purchase.

When Risk Passes From Seller to Buyer

The point at which risk shifts differs between states. In Victoria, the Sale of Land Act generally keeps risk with the seller until settlement, and any insurance policy the seller maintains during that period is treated as covering the buyer's interest too, unless a special condition changes this. In New South Wales, the standard contract passes risk to the buyer from the date of exchange, which is precisely why buyers in New South Wales are generally advised to have building insurance ready to start from that date, not from settlement. Queensland's standard contract sits closer to the Victorian position, keeping risk with the seller until settlement in most circumstances. These differences matter enormously in practice, and a conveyancer familiar with your state's contract will confirm exactly which clause applies to your purchase.

Why Buyers Should Not Wait for Settlement to Insure

Even in states where legal risk technically remains with the seller until settlement, most lenders require a buyer to have their own building insurance in place from the date the contract becomes unconditional, as a condition of releasing loan funds. This is partly a practical safeguard: a seller's policy might lapse, be cancelled for non-payment, or an insurer might later argue it would not have covered a buyer's specific circumstances. Arranging your own cover early removes any doubt about whether you are protected, rather than relying on someone else's policy that you have no control over and may never have seen the terms of.

What Happens If the Property Is Damaged Before Settlement

If a property is damaged badly enough to be considered unfit for occupation before settlement, most standard contracts give the buyer the right to rescind, or to complete the purchase and receive any insurance proceeds instead. Minor damage is typically dealt with by an adjustment to the purchase price or a requirement that the seller repair the damage before settlement proceeds. In every case, the specific wording of the contract's damage and destruction clause, and which state's legislation applies, determines exactly what rights each party has, which is one more reason a special condition in this area should never be treated as boilerplate.

Strata Properties Work Differently

In a strata or community title scheme, the owners corporation is usually responsible for insuring the building itself, including common property and the structure of individual lots, funded through levies paid by all owners. A buyer of a strata lot generally does not need to separately insure the building, though contents insurance and cover for fixtures the owner has added are still the buyer's own responsibility. Confirming what the building policy actually covers, and whether it is current and adequate, is one of the things a strata report should be reviewed for alongside the owners corporation's broader financial position.

Bushfire and Natural Hazard Risk

Properties in mapped bushfire prone areas can face different insurance considerations, including higher premiums or specific construction requirements tied to a bushfire attack level rating. This is a separate issue to the legal question of when risk passes under the contract, but the two often come up together in the same purchase, since a property affected by a bushfire prone land finding is exactly the kind of property where buyers should not delay organising cover. Coastal and flood-prone properties raise a similar point, and it is worth asking an insurer for a quote before you are locked into a contract, not after.

If Settlement Is Delayed

A delayed settlement, whether because finance falls through and needs to be re-arranged, or because a related sale in a chain is running late, extends the period during which insurance needs to remain current and correctly dated. Buyers who are using equity in an existing property to fund a purchase should also check that their insurer has been told about the new settlement timeline, since a policy quoted against one start date does not automatically adjust itself if that date moves.

Practical Steps Before You Exchange

Get a building insurance quote before you sign anything, so you know cover is available and roughly what it will involve, rather than discovering a problem after you are contractually committed. Confirm with your conveyancer exactly when risk passes under your state's standard contract, and make sure your policy start date lines up with that, not with your expected settlement date. According to Consumer Affairs Victoria's guidance on the period before settlement, lenders commonly recommend cover from the date contracts are signed for exactly this reason, even where legal risk has not yet shifted.

Sellers have an interest in this too. Maintaining adequate insurance right up until settlement protects a seller from being left exposed if damage occurs while they are still the registered owner, and it avoids any argument with a buyer about whether a lapsed or cancelled policy left a gap in cover. Sellers moving out before settlement, particularly if the property is left vacant for an extended period, should also check whether their insurer treats an unoccupied property differently, since some policies reduce cover or add conditions once a home is no longer lived in.

This article provides general information only and is not insurance, tax or legal advice. Speak with your insurer and your conveyancer or solicitor about the specific risk arrangements in your contract.