If your house move is at risk of delay or falling through due to a specific legal issue with the property, you might be advised to look at purchasing indemnity insurance. Indemnity insurance provides protection to the buyer and mortgage lender against certain risks, which will allow the transaction to proceed.
Claim rates for indemnity insurance are however low, raising the question as to whether it is in fact needed.
But given what is at stake, for those involved in the sale (buyer, seller and mortgage company) it may be a small price to pay to keep momentum with the conveyancing process and, in the event something does go wrong in the future, provide cover for legal expenses incurred in resolving any issue. In some circumstances, the mortgage lender may specify that indemnity insurance is taken out before they will release the mortgage funds.
Why might indemnity insurance be needed?
As part of the conveyancing process, the buyer’s solicitor will conduct a number of searches against the property to ensure all is in order with the property title and deeds.
If a search returns any issues or defects, these will need to be resolved before parties can look to exchange contracts.
Where the solicitors have resolved the issues, for example where additional information or documentation has been provided, an unqualified Certificate of Title will be sent to the lender for the mortgage to proceed.
Where the buyer’s and seller’s solicitors have been unable to resolve the problem to the satisfaction of all parties, the solution may be to take out indemnity insurance to protect the buyer and lender from any legal problems arising from the identified risk or defect in the property title. As such, indemnity insurance should be considered a last resort in order of the sale to proceed.
What risks are covered by indemnity insurance?
Not all title defects can or should be resolved by indemnity insurance; changes made to the property without building regulations for example. Each case must turn on its own facts, and your solicitor should advise if there are alternative options to resolve the property or title defect.
Issues that may be covered by indemnity insurance include, but are not limited to:
- Where a property has been extended or otherwise altered without building regulations being met or planning permission being granted
- Where a restrictive covenant has been broken e.g. an extension has been built contrary to an existing restrictive covenant
- Where a grant of easement (permission to access your property via a particular piece of land) is not in place for a route onto your property
- Where the property has a liability for chancel repair, that is, the liability to pay for or towards repairs on the local church
- Where a gifted deposit (literally, a gift of money, from perhaps a family member) is used to purchase a property, to protect the person who made that gift should the property owner be declared bankrupt
- Planning permission and building regulation indemnity, where a local authority might seek to enforce breaches of planning regulations
- Where documents or information from property deeds are missing
- Concealed development risk, such as where an extension might have slightly exceeded the planning rules
The policy is usually purchased by the seller but is tied to the property itself, therefore passing onto the buyer when they take ownership of the property. It is purchased through a one-off payment that covers the problem or liability for the life of the property.
How long does the policy last?
Once live, the policy lasts the lifetime of the property. It should not need renewing and in most cases is automatically transferred to successors in title. You will need to confirm the duration and the position for any transfers with the insurer at the time you take out the policy.
Who is covered by indemnity insurance?
Indemnity insurance covers both the buyer and the lender against loss of value on the property as a result of the identified risk or defect.
How much is indemnity insurance?
As with all insurance policies, the cost of indemnity insurance will vary for each set of circumstances, though you should expect the premium to be in the region of £300-£600.
Who pays for indemnity insurance?
Unusually for an insurance product, indemnity insurance is paid for by one single payment. There is no strict guidance on which party should pay the insurance premium.
While indemnity insurance protects the buyer (and where relevant, the lender), should the property be devalued by the identified risk, in practice it is often the seller that pays the premium.
Payment of the premium is generally used by solicitors as a negotiating point, and depending on the circumstances, may even be split between the buyer and seller.
However, even where the seller pays the premium, the buyer will be responsible for any increased premium should they sell the property in the future.
How much can you claim?
The limit of the cover will be the purchase price of the property.
When the new owners come to sell the property, they should expect to pay a premium to ensure the policy covers any increase in the value of the property.
How do I buy a policy?
The indemnity insurance policy would be arranged through the solicitor handling your covenyacing.
Why legal advice is important
If a defect in the title is discovered as part of the conveyancing process, your solicitor should explain the options available to you to resolve the issue. If this includes consideration of indemnity insurance, they can advise on how the policy will work, who it will protect, the conditions of the policy and the premium to pay.