A change of ownership insurance is a special type of non-life insurance that, roughly speaking, covers hidden building damage that is not included in either the condition report or the electrical installation report and that the buyer was not aware of at the time of taking over the property. The damage must have been discovered during the insurance period and have occurred before the time of taking possession of the property. The change of ownership insurance covers all buildings on the property that have been inspected by the building surveyor and that appear from the applicable insurance agreement. The seller obtains a quote for the change of ownership insurance before entering into a binding agreement on the purchase of a property, and the change of ownership insurance is taken out by the buyer before handing over the keys.
According to the home inspection scheme, the buyer cannot make a claim for defects against the seller if the buyer has received a condition report, electrical installation report and information about change of ownership insurance before a contract for the purchase of a real estate property has been concluded. This includes defects in the physical condition of a building or if a building's electrical, heating, ventilation or sanitary installations are not functional or are illegal according to public law regulations.
The buyer can take out a change of ownership insurance and thereby obtain insurance coverage for certain damages to the property's buildings.
However, far from all physical defects are covered by the change of ownership insurance, and below is a general overview of how the buyer is covered.
Minimum requirements for the scope of coverage of the change of ownership insurance
The policyholder (buyer) is covered according to the policy conditions of the insurance. Therefore, the content of the insurance policy and the insurance terms and conditions are the clear starting point for determining whether a claim is covered or not.
Particularly relevant in this context is the "Executive Order on the scope of coverage for change of ownership insurance under the Danish Act on Consumer Protection in the Acquisition of Real Estate" - also known as the minimum coverage order.
This executive order contains minimum requirements for the scope of coverage of the owner's replacement insurance.
The minimum requirement for the scope of cover for change of ownership insurance is stated in appendix 1 of the minimum cover order. Below are a few examples of the minimum requirements for the scope of coverage:
The insurance covers all buildings on the property
The change of ownership insurance covers all buildings on the property. However, this does not apply if the individual building is explicitly stated as not inspected in the condition report.
The scope of coverage includes physical defects in the buildings. Conversely, conditions that do not relate to building parts are not covered by the change of ownership insurance.
For example, contamination of the land is not covered by the standard coverage of a homeowners' insurance policy. However, insurance companies may offer an extension of the scope of coverage.
Repair of current damage and physical conditions of the buildings that create an imminent risk of damage to the insured buildings or parts of buildings.
The executive order states that "damage" means breakage, leakage, deformation, weakening, cracking, destruction or other physical conditions in the building that significantly reduce the value or usability of the building compared to similar intact buildings of the same age in a generally good state of maintenance. Missing building parts can be damage.
"Imminent risk of damage" means that, based on experience, damage will develop if extensive maintenance work or other preventive measures are not carried out.
Significant reduction in the value or usability of the building
Only damage that significantly reduces the value or usability of the building is covered by the concept of damage and can thus constitute coverable damage. However, it is not clear from the wording of the executive order what exactly is meant by the wording "value" or "usability" of the building.
In practice, the Insurance Appeals Board often does not differentiate between the criteria "value" or "usability" in their decisions. Instead, the concepts are used as an overall, flexible yardstick.
Therefore, there are cases where it is proven that there is damage, but where the appeals board estimates that the condition is not of such a nature that it significantly reduces the "value or usability" of the building.
However, there is no doubt that damage can consist of either reduced value or usability.
Appeals board practice and the "construction value"
In several rulings, the Insurance Appeals Board has stated that the wording "significant reduction in the "value" of the building" in the definition of damage in the change of ownership insurance is to be understood as the building's technical value of the building and not the economic value.
However, what exactly is meant by the "technical construction value" of the building is an open question that has not been addressed by the Insurance Complaints Board or the courts.
The report on the home inspection scheme called for a clarification of what exactly is meant by the phrase "that significantly reduces the value of the building" in order to provide consumers with clarity about insurance coverage, but such a clarification did not find its way into the wording of the minimum order.
The question is therefore unresolved.
Perhaps some help can be obtained by comparing the physical condition of the damaged building with a similar intact building of the same age in a generally good state of maintenance and, based on this, ask yourself whether the damaged building can be considered to have been constructed in accordance with good craftsmanship and thus professionally correct at the time of construction. If the answer is no, there should be grounds for concluding that the damage reduces the value of the building.
If you have any questions about the article, please feel free to contact CLEMENS' real estate experts.
