INSURANCE OBLIGATIONS OF THE SELLER WHERE THE PURCHASER TAKES OCCUPATION OF THE IMMOVABLE PROPERTY PRIOR TO TRANSFER HAVING BEEN EFFECTED
The difference between possession and occupation
Occupation is the right to use and enjoy the property. Possession is associated with the legal risk of loss or destruction of the property and the right to enjoy the benefits associated with the property.
Many Agreements of Sale state that in the event of the purchaser taking occupation of the property before transfer, the purchaser will take occupation and possession.
It is a legal requirement for a valid indemnity insurance contract that the insured must at the time of loss, have an insurable interest in the property insured. An insurable interest exists when an insured has a financial interest in the property insured. According to authors Reinecke and van der Merwe in General Principles of Insurance Law published in 2002, a buyer of property (both moveable and immovable) has an insurable interest in such property despite not yet being the owner. The purchaser although not yet having real rights has the ius ad rem acquirendam (a personal right of delivery arising ex contractu) and if the property were destroyed this right of delivery would become compromised. This principle also applies to a tenant, as he has rights of use in the property hired by him that are both insurable and would become diminished were the property to be damaged or destroyed.
It is likely that a bank would prescribe to a mortgagor that he is obliged to keep the property insured whilst the property remains subject to a mortgage bond. The bank would come off risk when the outstanding loan has been settled (even though the bond may remain registered). However as re-advances of the loan are not frequent particularly in respect of access or flexi-loan facilities, a bank would continue to be exposed until all issues relating to the loan had been settled and the bond cancelled. In the circumstances a seller of property would as a matter of contract between a seller's bank and the seller (as borrower and owner) of the property, be obliged to continue insuring the property until transfer has been effected whether the purchaser has an insurable interest or not.
A recent finding by the Banking Ombudsman, Charles Pillay, against Nedbank found provisions in the Short Term Insurance Act permitting the Finance Bank to prescribe the identity of an insurer to an insured, as both uncompetitive behaviour and as unconstitutional. It is likely that the relevant provisions of the Act will now be changed. As a result of the finding many banks no longer prescribe the identity of the insurer and the insured may insure with any registered insurer of his choice.
Who bears the Risk?
Where the purchaser has assumed the risk of the property in terms of the Deed of Sale, there is no impediment to the purchaser insuring the property prior to transfer. If the Agreement determines that the purchaser bears the risk of loss or destruction of the property the purchaser would be not only entitled but obliged (in terms of the purchaser's agreement with a lending bank) to insure the property.
If the Deed of Sale is silent on the issue of who bears the risk it would be a matter of law to determine who does but it would be safe to suggest that the owner would in most instances bear the same. It is however possible for both the seller and the purchaser to have an insurable interest in the property at the same time.
The Deed of Sale
Many Deeds of Sale contain a clause which obliges the seller to insure until transfer. Although the seller has an insurable interest in the property he may at the same time have to pay an insurance premium in respect of his new home. If the obligation is consequent upon a bank requirement the premium should ideally be factored into the occupational interest payable in terms of the Deed of Sale, as the purchaser has a very real interest in the property and the seller has already moved on.
If the bond has been cancelled or if the bank consents, there is no legal reason why the seller and not the buyer, should be obliged to continue to insure the property until transfer. It would however be in the interest of the Seller to see to it that the property remains insured until transfer because passing of risk to the buyer combined with an obligation to insure does not diminish the financial risk the seller bears if the property is destroyed or damaged and the policy not paid up or honoured.
Must the Insurer be notified?
As a general rule the occupation by a tenant does not materially change the risk the insurer bears and as such does not provide a basis for repudiation of a claim for insured damage or loss. It may however be a term of the existing policy that the insurer be notified if a tenant occupies the insured premises. In such an instance it would be advisable to notify the insurer as in the absence thereof the insurer may repudiate a claim arising whilst the premises are occupied by the purchaser prior to transfer. Before allowing a purchaser to take occupation it would accordingly be prudent (whether necessary or not) for the seller to notify his insurer of the change in occupation.