This clause allocates responsibility for obtaining and maintaining insurance coverage on real property (land, buildings, or improvements) during the period when the property is in transit, being transferred, or in a transitional state of ownership or possession. In real estate transactions, "transit" can refer to several scenarios: physical movement of structures or materials, the period between contract signing and closing when the property changes hands, or situations where property is being relocated or renovated. The clause specifies who must carry insurance, what risks must be covered (fire, theft, weather damage, liability), the required coverage limits, and what happens if damage occurs during this vulnerable period. This matters because real property is typically a party's most valuable asset, and gaps in insurance coverage during transitions can result in catastrophic financial loss with no recourse for recovery.
The clause also addresses the critical issue of risk of loss—the legal principle determining who bears financial responsibility if property is damaged or destroyed before the transaction is complete. In many jurisdictions, the buyer assumes risk of loss upon signing the contract, even though the seller still owns the property. Without clear insurance obligations in the contract, a property could be destroyed by fire the day before closing, leaving the buyer with no building but a legal obligation to pay the full purchase price. The clause protects both parties by ensuring continuous coverage and clarifying who can collect insurance proceeds if damage occurs. It also typically addresses proof of insurance (certificates, policy copies) and requirements to name the other party as an interested party on the policy.
Require the party responsible for insurance to provide a certificate of insurance naming the other party as an additional insured or loss payee before the property enters the transitional period. Specify the minimum coverage amounts (typically 100% of the property's replacement value) and required coverage types (all-risk or named-peril, liability, etc.). Establish a clear timeline for when insurance must be in place and require the insured party to maintain coverage until the transaction closes or the property is fully transferred. Include language requiring immediate notice if the policy is cancelled, lapses, or is materially modified. Address the procedure for collecting and distributing insurance proceeds if damage occurs—typically, proceeds should be held in escrow and applied to repairs or credited at closing. For properties under construction or renovation, clarify whether builder's risk insurance is required and who maintains it. Consider requiring proof of insurance renewal if the transitional period extends beyond the initial policy term.
Frequently Asked Questions
What does this clause mean in simple terms?
This clause allocates responsibility for obtaining and maintaining insurance coverage on real property (land, buildings, or improvements) during the period when the property is in transit, being transferred, or in a transitional state of ownership or possession. In real estate transactions, "transit" can refer to several scenarios: physical movement of structures or materials, the period between contract signing and closing when the property changes hands, or situations where property is being relocated or renovated.
Why should I care about this clause?
The clause specifies who must carry insurance, what risks must be covered (fire, theft, weather damage, liability), the required coverage limits, and what happens if damage occurs during this vulnerable period. This matters because real property is typically a party's most valuable asset, and gaps in insurance coverage during transitions can result in catastrophic financial loss with no recourse for recovery.
What are my options?
The clause also addresses the critical issue of risk of loss—the legal principle determining who bears financial responsibility if property is damaged or destroyed before the transaction is complete. In many jurisdictions, the buyer assumes risk of loss upon signing the contract, even though the seller still owns the property.
How does this affect small businesses?
Without clear insurance obligations in the contract, a property could be destroyed by fire the day before closing, leaving the buyer with no building but a legal obligation to pay the full purchase price. The clause protects both parties by ensuring continuous coverage and clarifying who can collect insurance proceeds if damage occurs.