Indemnity insurance is typically filed under the heading of ‘incomprehensible things conveyancers say.’ Though we won’t argue that a lot of what we come out with possibly is incomprehensible… we happen to subscribe to the new-fangled idea that it’s important for clients to actually understand what’s happening with their property transaction.
With this in mind, we’ve set out to share a full primer on indemnity insurance in non-legal and non-dull language. (You might have to forgive us on the dullness front, though. We’re conveyancing solicitors, not magicians, and this stuff is hardly thrilling).
What actually is indemnity insurance?
In conveyancing, an indemnity insurance policy is something conveyancers may recommend if there’s any whiff of an unresolved issue cropping up down the line. Essentially, it’s a type of insurance that protects against the possibility of legal issues for the current owner of a property as a result of something a previous owner has (or hasn’t) done.
For example, say you’re buying a house from someone who has done a full renovation, only they can’t put their hands on a few crucial pieces of paperwork regarding building regulations. Without that paperwork, the seller can’t prove that building regulations have been met, which could throw off the whole transaction.
At this point, your conveyancer could negotiate with the seller’s solicitor over the purchase of an indemnity insurance policy. With the policy in place, you would be protected against any problems that might arise in the future as a result of the missing paperwork. For example, the policy would pay out if your local council decided to fine you because the work done on your property didn’t in fact meet building regulations.
Why might you need indemnity insurance?
There are a wide range of reasons why your solicitor might advise having an indemnity insurance policy in place. These include:
Concern about covenants
Some properties are bound by ‘restrictive covenants’ which are restrictions previous property owners have imposed. For example, the builders of an estate may put a covenant in place to say none of the properties could be extended. If there is concern that these restrictions have been breached, an indemnity insurance policy can protect you against any future action.
Distress about deeds
Sometimes there are problems with property deeds that are not easily fixed. For example, there may be ambiguity over who owns the property – or parts of it – and there may be concern that someone else could have the right to contest ownership. An indemnity insurance policy would cover the cost of any related legal challenges.
Panic about permission
The most common reasons for purchasing indemnity insurance is because of issues relating to planning permission and/or building regulations. This could be because there is missing paperwork like the example above, or it could be because work has simply been done to a property without permission. Specific indemnity policies for properties that are listed or in conservation areas can also be purchased.
Angst about access
Some properties are restricted by access requirements, e.g. your water supply or septic tank might actually be located on a neighbour’s property, or you might have to pass over part of someone else’s land to access your driveway. An indemnity policy would pay out in the event of any legal problems related to neighbours blocking access.
Bother about bills
Some older properties have a condition in their deeds that states that the property owners have a responsibility to contribute to the cost of local church repairs. If you were buying a property that came with these chancel responsibilities, an indemnity insurance policy would cover the cost of any contributions the owners were required to make.
Laments about leases
If you are buying a leasehold property, the lease could well be something of a Pandora’s Box. There may be issues related to the length of time left on the lease or restrictions that are placed on how you can live in the property. Indemnity insurance would cover the cost of any fines or legal challenges that arose in relation to the lease.
How do indemnity insurance policies work?
This type of insurance policy is different to standard policies in that they only have to be paid for once (Really! No annual premiums!) and that they remain valid for many years, even if the property is sold on.
Standard indemnity policies usually cost between £20 and £2000, depending on the type of issue and the size of the property in question. If a bespoke policy is needed, it’s likely to cost more.
Though indemnity policies are always for the benefit of the buyer, they can be purchased by either the buyer or the seller. The seller often pays for the policy if they’re likely to lose the sale otherwise. A conveyancer worth their salt will negotiate the best deal for everyone involved.
Is indemnity insurance always the right choice?
You could be forgiven for reading the information above and concluding that indemnity insurance providers are the fairy godmothers of the conveyancing world. However, though this type of policy can be very reassuring and certainly has a place in property transactions… they’re very much not a miracle solution.
For one thing, an indemnity insurance policy will not stop things going wrong or keep you from getting embroiled in a legal tussle. For example, an indemnity insurance that will cover the cost of a legal battle over access won’t actually stop any nasty situations cropping up about said access.
What else wont it do?
Indemnity insurance is great if you need protection against legal wrangling. What it won’t do, sadly, is protect you if the work done, which didn’t have building regulations approval, was of poor quality and the house falls down as a result of it. If you have any doubts about structure, you should consult a surveyor and you should always maintain a suitable level of buildings insurance to protect (one of) your most valuable assets.
Indemnity insurance is also not always suitable: your conveyancer will have to consider all the circumstances to ensure a standard policy would pay out if it was needed.
What can you do instead?
In most cases we’d say it’s better to actually fix the problem than it is to buy an indemnity insurance policy. This is particularly the case with issues relating to title defects (problems with the deeds) or absence of easement (problems with access).
It might add a few weeks or months to your transaction to put problems right… but taking this time will mean there’s absolutely no chance of those problems coming back to bite you in the proverbial behind later on. We don’t know about you, but we think that’s well worth being patient for.
Worried about indemnity insurance and whether it’s the right choice for you? Never fear, we’re always on hand to help you through, whether it’s panic about permission, angst about access or laments about leases.