Indemnity Insurance: Protection or Pointless?

What is it?

An Indemnity is an insurance policy used in conveyancing transactions where problems arise that are not easily or quickly rectified. By taking out the insurance the problem or defect in the sellers title remains, the insurance does not rectify the defect, however the risk and associated costs are passed on to a third party i.e. the insurer.

Who should pay for it?

Generally it is the seller who would be liable to pay for an indemnity policy as the defect or problem is with their property. However, not every seller will agree to pay for an indemnity especially if they do not see the purpose of having one in place. It can therefore fall on the purchaser to put one in place especially if it is a condition of the purchasers’ mortgage offer that the relevant defect is indemnified against.

What do the policies cover?

You can obtain specific policies to cover various risks. Some of the more common instances that require indemnity insurance are detailed below:

Lack of Planning Permissions/Building Regulations –

DEFECT: the seller has carried out works at the property that would have required Planning Permission, Building Regulation Approval and/or compliance with Building Regulations, but did not obtain the relevant permission, approval or compliance documentation.

COVER: The insurance would be taken out to cover the chance of the Local Authority taking enforcement action against the owner of the property for failing to obtain the relevant permission, approval or compliance documentation. This action could include a requirement to remedy the works to ensure compliance with building regulations or removing the works undertaken altogether. Therefore the costs to the owner of the property if a policy wasn’t taken out could be massive.

However, these policies would only be necessary within the Council’s enforcement periods. As a general rule Building Regulation issues are not enforced after 2 years of the work being carried out and Planning issues are not enforced after four years of the work being undertaken.

ALTERNATIVE TO INSURANCE: The alternative to obtaining insurance would be to obtain retrospective planning permission and/or to have the property inspected by Building Control for a completion certificate to be issued. This could be time consuming, there is no guarantee retrospective planning permission would be given and if it was given there may be additional works to do to comply with the permission or obtain the completion certificate.

Flying Freehold –

DEFECT – If part of a freehold/leasehold house overhangs or protrudes under land or buildings within a different persons title and there are no rights of entry for maintenance and repair, support and protection or covenants in respect of maintenance in the deeds to the property this is known as a flying freehold. Mortgage lenders will only lend on such properties if there is an indemnity in place.

COVER – The insurance would cover the situation where the insured was unable to compel the owner of the other building to undertake the repairs required to their own property or make a contribution towards the cost of work undertaken by the insured to ensure the shelter, support or protection of the insured’s property. The insurance would also cover the instance where the failure to carry out repairs caused a reduction in the market value of the property and would also assist in any litigation costs involved in defending the insureds position.

ALTERNTIVE TO INSURANCE – Entering into a deed which would put the necessary rights and covenants into place. This again could be timely and only an option if the other property owner was in agreement.

Breach of Covenants –

DEFECT –  restrictive covenants are provisions in the deeds to a property which restrict the owner of the property from doing certain things such as not building an extension without the prior written approval of the person with the benefit of the covenant. If the owner of the property had breached this covenant, as in built an extension without the prior written approval, it is considered a breach of covenant and therefore a defect in title.

COVER – In theory the person with the benefit of the covenant can enforce it and insist that the extension be taken down for example. The costs can mount very easily as the matter could go through the courts to enforce the covenant.

ALTERNATIVE TO INSURANCE – In the above example the alternative would be to obtain retrospective consent from the person with the benefit of the covenant. This may not always be forthcoming and would also alert the relevant person to the breach and therefore run the risk of them pursuing an action for breach of covenant.

How long will a policy last and do I have to pay each year to keep the cover in place?

Generally policies last in perpetuity i.e. forever (however this is not always the case and if there is a shorter term your solicitor will advise you of this). There is only a one off payment for the policy.

Do I have to take it out?

If the purchaser’s mortgage provider required the relevant indemnity to be put in place this will have to be done. If it is not a lenders requirement it is up to the purchaser to determine whether they wish to pursue the seller for the indemnity or to pay for it themselves.

Is there really any point to the policy?

Policies are taken out to cover a known risk. The likelihood of that risk transpiring can be very remote on occasion making it seem “pointless” to take out however if it were to transpire the costs could be massive as detailed in the policy examples above. So when taken into perspective a payment of £150 is worth the expenditure if it saves you costs of £15,000 at a later date.

If you require any further information in respect of indemnity policies or any other matter relating to property transactions please do not hesitate to contact a member of the Residential Property Team on 0345 20 73 72 8 or conveyancing@thursfields.co.uk