Real Estate Insurance FAQs: Why You Need Insurance to Close a Purchase
Why is property insurance required to close a real estate purchase?
Property insurance is a fundamental requirement for closing a real estate purchase because mortgage lenders will not fund the mortgage without it. This insurance protects both the buyer and the lender in case of damage or loss to the property. Failing to secure insurance can result in delays or even the collapse of the deal.
What if a buyer is purchasing without a mortgage? Is insurance still required?
While property insurance is not legally required in British Columbia for buyers purchasing without a mortgage, it is strongly recommended. Without insurance, buyers are personally responsible for any damages or losses to the property, which can be financially devastating. For strata properties, the strata corporation's insurance typically covers common areas and the building's structure but does not extend to the individual unit owner's personal belongings, improvements, or liability. Moreover, if damage originates from a unit and affects common property or other units, the owner may be responsible for the strata corporation's insurance deductible, which can be substantial. Therefore, prudent buyers should obtain adequate insurance coverage to protect their investment and mitigate potential financial risks.
What can cause delays or issues with obtaining property insurance?
There are several reasons why obtaining property insurance may be delayed or complicated:
- Timing Issues: Sometimes buyers wait too long to secure insurance, which can delay the closing process.
- Property-Specific Challenges: Factors like fireplaces or wood-burning stoves without a valid Wood Energy Technology Transfer inspection can make insurance difficult to secure.
- Environmental Risks: During wildfire season, insurers may refuse coverage for properties within a 100 km radius of an active fire.
- Proximity to Safety Infrastructure: Distance from fire halls or hydrants can affect insurability.
- Condition of the Property: The age or disrepair of structural aspects may impact the availability of full replacement coverage.
What happens if the insurance policy is not bound in time for closing?
If the insurance policy is not in place by the closing date, the mortgage lender will not release funds, causing significant delays or potentially collapsing the deal altogether. Extensions might be requested, but there is no guarantee that the seller will agree.
Are there specific property features that can make insurance harder to obtain?
Yes, features like fireplaces or wood-burning stoves can make it challenging to get coverage without a valid inspection. Additionally, older properties or those in poor condition may not qualify for full replacement insurance, which is often required by lenders.
Can natural disasters affect my ability to obtain insurance?
Absolutely. Recent natural disasters such as wildfires, floods, or landslides can make insurers hesitant to offer coverage. Even properties located far from a current wildfire might face challenges if they are within a typical radius of 100 km from the fire.
What can buyers do to avoid insurance-related delays?
As soon as your offer is accepted, a Buyer should begin the insurance application process. And buyers should request, obtain, and bind insurance policies early in the conveyancing process.
When should insurance coverage start?
Buyers should ensure their insurance coverage begins on the completion date, not the possession date. According to Section 16 – Risk and Section 8 – Condition of Property in the standard Contract of Purchase and Sale, the risk of loss or damage to the property transfers to the buyer at 12:01 AM on the completion date. Even if you don’t take possession right away, you’re responsible for any potential damages from that point forward. Sellers are expected to maintain the property in substantially the same condition as when it was viewed, but overlapping insurance coverage is wise. Both the buyer and seller having active policies until the property fully changes hands provides added protection from unexpected costs.
Insurance is often one of the last things buyers think about—but it shouldn’t be. Whether you're buying with a mortgage or in cash, having proper insurance in place is essential to protecting your home and financial future. The earlier you start the process, the fewer surprises you'll face as closing day approaches. Work closely with your REALTOR® and insurance provider to make sure your coverage is secured well ahead of time, so you can move forward with confidence and peace of mind.
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