Most buyers will rely on the vendor’s home insurance policy to protect them if the property is damaged before the closing date, however, there are risks associated with doing so. For that reason, in Wile v Cook the Supreme Court of Canada suggested that buyers should consider obtaining home insurance as soon as they have signed the Agreement of Purchase and Sale (APS).
The standard APS used in Ontario provides: “Pending completion, Seller shall hold all insurance policies, if any, and the proceeds thereof in trust for the parties as their interests may appear and in the event of substantial damage, Buyer may either terminate this Agreement and have all monies paid returned without interest or deduction or else take the proceeds of any insurance and complete the purchase.”
Therefore, if the property is damaged prior to closing, the buyer would elect to either terminate the agreement and have their deposit returned or complete the transaction and accept the insurance proceeds from the vendor’s policy.
Unfortunately, in Wile v Cook, the Supreme Court of Canada explained that the insurance clause does not permit the purchaser to “wait and see” if the vendor’s insurer will pay out monies under the policy. Thus, if the buyer elects to close the transaction, the clause does not give the buyer any guarantee that the insurance is in fact collectible.
Additionally, the APS does not require the vendor to have home insurance at all, and in that case the purchaser’s only option would be to terminate the agreement. This may be frustrating for buyers if the property is unique, or if the market has risen significantly since entering into the agreement and the buyer can no longer afford to purchase a comparable home.
Finally, the APS states that the damage must be “substantial” in order for the insurance clause to take effect. A review of the case law indicates that it’s not entirely clear what qualifies as “substantial damage”. This is concerning, as the onus is on the buyer to determine if an election is to be made under the insurance clause. For example, in Bilotta v Booth, the basement flooded prior to the closing date and the buyers refused to close. The owners subsequently sold the house at a $100,000 loss, and the buyers were liable for the difference on the basis that the damages were not actually “substantial”, and therefore they were not entitled to refuse to close.
For these reasons, it is best to insure the home immediately upon signing the APS.
At simplyclose, our experienced real estate lawyers can help you plan your transactions. We take the time to walk you through your options and ensure you are fully informed and comfortable with your choices. For more information, please contact our office at 519-997-3775 or [email protected]. Our real estate lawyers and closing specialists are always available to help.
Author: Lauren Delgreco, Law Student
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