INSURANCE IN THE CONVEYANCING PROCESS

• Author: BARRY C. CROWN
• Published date: 01 December 1993
• Date: 01 December 1993

Introduction

It is trite law that the risk on a contract for the sale of land passes as soon as the contract is made. If the house is burnt down after exchange of contracts, the purchaser must still complete and must pay the full price as stated in the contract even though he may now be buying only a charred ruin. Such a statement may well surprise the layman, but it has been the accepted law for at least a hundred years since the case of Lysaght v. Edwards1 was decided in 1876. Doubts have been expressed about the rule that the risk passes at the moment the contract is made,2 but it has been accepted for so long that it is highly unlikely that it can be reversed except by legislation. Such legislation has indeed been recommended in England by the Law Commission, but this recommendation has not as yet been acted on.3

The statement that a purchaser may be compelled to buy a charred ruin causes little concern to the conveyancer, who sees it simply as pointing to the need to ensure adequate insurance cover for the purchaser as from the moment of exchange of contracts. In this article, therefore, the focus of attention will be on how the risk can be covered by insurance, bearing in mind particularly the provisions of section 3(13) of the Conveyancing and Law of Property Act.4

In practice the vendor will have his own property insurance. Since the risk passes to the purchaser on exchange of contracts, he could in theory cancel his own insurance at that point. In a sense, the purchaser has now become his insurer. He can still recover the full price from him whatever happens to the property. The obvious problem, however, is that there are exceptional cases where specific performance is not available. Moreover, as an insurer the purchaser may be less reliable than the vendor’s insurance company. The purchaser may not have the money to complete and, even if he has, it may not be possible to recover the purchase price from him without recourse to litigation. For these obvious practical reasons vendors do not cancel their

property insurance until completion. The equitable interest in the property passes to the purchaser on exchange of contracts,5 but the vendor retains, of course, the legal title. He also has an unpaid vendor’s lien over the property to secure the purchase price and there is no doubt that he has an insurable interest in the property until he conveys it to the purchaser.6

The vendor will invariably retain his own property insurance until completion. Even though the risk passes to the purchaser from the moment of exchange of contracts, at common law it is the vendor and not the purchaser, who has the benefit of this insurance. The insurance policy is a personal contract between the insurance company and the vendor, and it was held in 1881 in Rayner v. Preston7 that it does not pass automatically to the purchaser on exchange of contracts. The question arises as to whether the vendor can still sue for the purchase price even though he has recovered in respect of his loss under his insurance policy. The answer, of course, is that because the risk has already passed to the purchaser, he must still pay the full purchase price. The fact that the vendor has already been paid by his insurance company in respect of this loss is res inter alios acta. Of course, were the vendor to recover the full purchase price in addition to his insurance claim, he would be unjustly enriched. It was therefore held in 1883 in Castellain v. Preston8 that the vendor’s insurance company can recover back from him the purchase price up to the amount of the claim it has settled. Indeed, once the insurance company has paid the vendor, it is subrogated to his position and can sue the purchaser in his name to make good its loss. In view of this risk, it is all the more important for the purchaser to arrange his own insurance even though he knows that the vendor is retaining his.9

The result of this legal position is that both the vendor and the purchaser maintain insurance on the same property in respect of the same risks during the period between contract and completion. However, as a general rule only the purchaser’s insurance company is liable to pay for any loss. If the vendor’s insurance company settles a claim, it can get the money back later from the purchaser, unless the latter is insolvent. Having two insurance policies in these circumstances may be seen as a benefit to the insurance industry as a whole. To anyone who does not have shares in an insurance company, it is likely to seem an extremely wasteful procedure and one that brings little credit to the legal system.

Legislative Intervention

Concern about this problem is nothing new. Over a hundred years ago, legislative action was taken and the result is what is now known as section 3(13) of the Conveyancing and Law of Property Act. This provides as follows:

“On a sale of property a stipulation shall be implied that the purchaser shall be entitled to the benefit of any insurance against fire which may be then subsisting thereon in favour of the vendor.”

The subsection was introduced as part of the Conveyancing and Law of Property Ordinance 1886.10 Many of the provisions of this Ordinance, including much of what is now section 3, are derived from the English Conveyancing and Law of Property Act 1881. The English Act does not, however, contain an equivalent to Singapore’s section 3(13). Moreover, this subsection is not derived from the Indian legislation, repealed by the Conveyancing and Law of Property Ordinance, which previously governed conveyancing in the Straits Settlements.11 The subsection seems to be a local legislative response to the then recent cases of Rayner v. Preston12 and Castellain v. Preston.13

In England section 47 of the Law of Property Act 1925 deals with the situation slightly differently.

47. Application of insurance money on completion of a sale or exchange

(1) Where after the date of any contract for sale or exchange of property, money becomes payable under any policy of insurance maintained by the vendor in respect of any damage to or destruction of property included in the contract, the money shall, on completion of the contract, be held or receivable by the vendor on behalf of the purchaser and paid by the vendor to the purchaser on completion of the sale or exchange, or so soon thereafter as the same shall be received by the vendor.

(2) This section applies only to contracts made after the commencement of this Act, and has effect subject to —

1. (a) any stipulation to the contrary contained in the contract,

2. (b) any requisite consents of the insurers,

3. (c) the payment by the purchaser of the proportionate part of the premium from the date of the contract.14

In practice, purchasers in England make their own insurance arrangements rather than relying on section 47. One obvious difficulty with the statutory scheme is that it requires the obtaining of “any requisite consents of the insurers”.

Returning to Singapore law, there do not seem to be any reported cases on section 3(13) despite its relative antiquity. Presumably this is because the subsection is usually excluded in the contract of sale, as conveyancers prefer to make other arrangements to deal with insurance.15 One obvious reason for this is the fact that the subsection covers only fire insurance. This may have seemed sufficient at the time the subsection was enacted. In today’s more sophisticated insurance environment, this is clearly inadequate. One can imagine many other risks affecting property which need to be insured against. For example, there is the risk of flooding or subsidence, which would not be covered by the subsection. Since the purchaser has to arrange his own insurance to cover these and other risks, some form of comprehensive arrangement will be necessary, which will cover the risk of fire too. In these circumstances, reliance on the subsection becomes unnecessary. The result is that one returns to the problem of double insurance that the subsection sought to avoid.

In theory this problem could be overcome by amending the statute to replace the words “insurance against fire” by the words “property insurance”. However, before recommending this course of action, it is necessary to consider how the subsection is intended to operate and whether it could in fact achieve its purpose. If not, more extensive amendment may be required. Given that in practice the subsection is rarely relied on, this may seem an academic exercise. Conveyancers make other arrangements and in practice these seem to work. However, as has been seen, these other arrangements may well necessitate some form of double insurance, which is a wasteful practice. In the past...