Change of ownership insurance is a special type of damage insurance that, roughly speaking, covers hidden building damage that is not apparent from either the condition report or the electrical installation report, and which the buyer was not aware of at the time of acquisition. The damage must have been discovered during the insurance period and must have occurred before the date of acquisition of the property. The change of ownership insurance covers all buildings on the property that have been inspected by the building expert and are listed in the current insurance agreement. The seller obtains quotes for change of ownership insurance before a binding agreement to purchase a property is entered into, and the change of ownership insurance is taken out by the buyer before the keys are handed over.
According to the home inspection scheme, the buyer cannot make claims against the seller for defects if the buyer has received a condition report, electrical installation report, and information about change of ownership insurance before an agreement to purchase a property has been entered into. This includes defects and deficiencies in the physical condition of a building, or if a building's electrical, heating, ventilation, or sanitary installations are not functional or are illegal under public law regulations.
The buyer can take out change of ownership insurance and thereby obtain insurance coverage for certain damage to the property's buildings.
However, not all physical defects are covered by the change of ownership insurance, and below is an overview of how the buyer is covered.
Minimum requirements for the scope of coverage of change of ownership insurance
The policyholder (purchaser) is covered in accordance with the terms and conditions of the insurance policy. It is therefore clear that the content of the insurance policy and the terms and conditions of insurance determine whether or not a claim is eligible for coverage.
Particularly relevant in this context is the "Executive Order on the Scope of Coverage for Change of Ownership Insurance under the Act on Consumer Protection in Connection with the Acquisition of Real Estate" – also known as the Minimum Coverage Executive Order.
This executive order contains minimum requirements for the scope of coverage of change of ownership insurance.
The minimum requirements for the scope of coverage for change of ownership insurance are set out in Appendix 1 to the Minimum Coverage 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 expressly stated as not inspected in the condition report.
The scope of coverage includes physical defects in the buildings. Conversely, matters not relating to building components are not covered by the change of ownership insurance.
For example, contamination of the land is not covered by standard change of ownership insurance. However, insurance companies may offer extended coverage.
Repair of current damage and physical conditions in the buildings that pose an imminent risk of damage to the insured buildings or building parts.
The announcement 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 repair. Missing building parts may constitute damage.
"Imminent risk of damage"means that, based on experience, damage will occur unless extensive maintenance work or other preventive measures are taken.
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 therefore constitute damage eligible for coverage. However, the wording of the executive order does not specify what exactly is meant by the terms "value" or "usability" of the building .
In practice, the Insurance Appeals Board often does not differentiate between the criteria of "value" or "usability" in its decisions. Instead, the concepts are used as a comprehensive, flexible yardstick.
There are therefore cases where it is proven that damage has occurred, but where the appeals board assesses that the damage is not of such a nature that it significantly reducesthe"value or usability"of the building.
However, there is no doubt that damage can consist of either a reduction in value or usability.
Appeals board practice and the "structural engineering value"
In several rulings, the Insurance Appeals Board has held that the wording "significant reduction in the value of the building" in the definition of damage in change of ownership insurance must be understood as the building's structural value and not its economic value.
However, what exactly is meant by the "structural value" of a building is an open question that has not been addressed in detail by the Insurance Appeals Board or the courts.
The report on the building inspection scheme calls for clarification of what is meant by the phrase "significantly reduces the value of the building," in order to provide consumers with clarity regarding insurance coverage, but such clarification was not included in the wording of the minimum regulation.
The question therefore remains unresolved.
Perhaps some help can be found by comparing the physical condition of the damaged building with a similar intact building of the same age in good condition and then asking 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 this article, please feel free to contact CLEMENS' real estate experts.
