If you are involved in a real estate transaction, the subject of property insurance will invariably come up in your discussions with your lawyer. Whether you are dealing with a real estate purchase, sale, or mortgage transaction, there are some key considerations relating to property/fire insurance that are important to take note of.

Both Buyers who are obtaining a mortgage to finance their purchase, and existing property owners who are refinancing their property should be aware of the requirement to add their lender’s interest to their insurance policy. In both cases, your lawyer will require you to provide a copy of your property insurance binder, effective as of the closing date of your transaction and noting your lender as a “loss payee”. Adding a loss payee clause to your policy is mandatory each time you obtain a new mortgage, as it ensures the protection of your lender’s financial interest in the property. Should the property burn down or be otherwise damaged, your lender will have first rights on any insurance claim payments. The process of adding a loss payee to your policy is typically straightforward and involves contacting your insurance company and providing them with your lender’s name and address for service. This task should not be delayed as your lawyer will not be able to close your transaction without the insurance binder, and your closing may be delayed as a result.

For Sellers of real estate, there may be a temptation to call your insurance company and arrange for the cancellation of your policy, effective as of your closing date – this is not advisable. In accordance with Section 14 of the standard OREA form of Agreement of Purchase and Sale, the property remains at the risk of the seller until completion:

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There are many instances (colloquially referred to amongst real estate lawyers as “escrow closings”) whereby closing deliverables are exchanged between Seller and Buyer on the closing date, however this exchange occurs past 5:00 p.m., precluding the Buyer’s lawyer from registering the Transfer/Deed on the same day. The property thus legally remains at the Seller’s risk, and this creates a gap in time where the Seller may be exposed to liability until the Transfer/Deed is registered on the following business day. Sellers can avoid exposure to this sort of liability by ensuring that their policy does not expire until a few days after the scheduled closing date, to allow for the possibility of an “escrow closing”, or even an outright extension of the closing date if the circumstances call for such. The upshot is that a Seller should not be in a hurry to cancel the Seller’s insurance policy and should not do so until the Seller receives confirmation from the Seller’s lawyer that the transaction has been completed.

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