Won a Factory at Auction: Who Insures It Before You Get the Keys?

Key Takeaways

• Read the conditions of sale for when the risk passes to you. From that point, loss or damage to the factory is your problem, even before you have the keys.
• The defaulting owner's fire policy may have lapsed. Do not rely on it; it insures the owner, and premiums often stop when loan payments stop.
• An empty factory is a different risk. Many policies restrict cover when a building is unoccupied for a long period. Tell the insurer it is vacant.
• If you finance the balance, the bank will need fire cover with itself as loss payee before it releases the loan.
• Insure the building at rebuilding cost, not the auction price, and add flood if the area needs it.

Buyers of auctioned factories plan the deposit and the balance carefully, then forget the building is uninsured while the paperwork runs. This guide explains when to insure and how. It is general information, not insurance or legal advice.

When does the factory become your risk?

The proclamation's conditions of sale set out the purchaser's obligations: the deposit at the auction, the balance within the stated period, and what happens if you fail to pay. They also tell you whether the property is sold as it stands and whether vacant possession is guaranteed. Read them with your lawyer for when the property is at your risk. As the successful bidder you have an insurable interest from the sale, so you can insure the building from that date if the conditions put the risk on you.

Why you cannot rely on the owner's policy

The owner who defaulted may have stopped paying the fire premium along with the loan, and a bank-arranged policy protects the bank's interest, not yours. Even a policy still in force is the owner's contract. Arrange your own.

Insuring an empty or neglected factory

Auctioned factories are often empty, sometimes for months. That affects cover:

• Tell the insurer the building is unoccupied. Many policies restrict cover after a period of vacancy; an undeclared vacancy can lead to a disputed claim.
• Secure the site. Empty factories attract theft of cables, fittings and roof sheets, and intrusion. Change locks once you have access, and check the fence and gates.
• Note existing damage with photos at handover, so a later claim is not argued as old damage.
• Check the roof and drains before the rainy season; leaks and blocked drains on an empty building cause damage nobody sees for weeks.

Inspect before bidding where you can; our guide on inspecting an auction property before bidding covers what to look at.

How much to insure for

Insure the building at its rebuilding cost, not the auction price. An auction price below market does not make the building cheaper to rebuild, and under-insurance triggers the average clause, which cuts a claim in proportion. Lulu Loke's fire insurance Q&A explains the basis, and her factory fire insurance guide covers flood and other extensions. If the factory is in a low-lying area, ask whether flood can be added.

If a bank is financing the balance

The bank financing your purchase will normally require fire insurance on the building with the bank named as loss payee before it releases the loan. You can generally use your own insurer as long as the bank's requirements are met; see whether the bank's fire policy is enough. Arrange it early so it does not hold up the balance payment, which has a deadline under the conditions of sale.

When you let the factory out

Many auction buyers of factories are investors who will let the unit. Tell the insurer when a tenant moves in and what the tenant does, and require the tenant to insure its own machinery, stock and fit-out.

Frequently Asked Questions

Who insures an auctioned factory before I get the keys?

Check the conditions of sale for when the property is at your risk. From then, arrange your own fire insurance; do not rely on the defaulting owner's policy.

Can I insure a factory I won at auction before the transfer is registered?

As the successful bidder you have an insurable interest from the sale, so an insurer can cover the building from that date. Tell the insurer the circumstances, including that the building is vacant.

How much fire insurance does an auctioned factory need?

The rebuilding cost of the building, not the auction price. Under-insurance triggers the average clause and reduces any claim in proportion.

Does my bank require fire insurance for an auction factory loan?

Normally yes, with the bank named as loss payee, before it releases the loan. You can generally use your own insurer if the bank's requirements are met.