What is an indemnity policy?
If you’re buying a property, the chances are you know you’ll need Buildings Insurance, especially if you’re arranging a mortgage. But what if you’re advised to take out an ‘indemnity policy’ during a property transaction? You may not be so sure. This helpful article answers the questions most frequently asked including:
At the outset, it’s worth mentioning that indemnity policies can cover a range of risks (professional, malpractice, health, automotive and buildings) but for the purposes of this article, we’re looking specifically at legal indemnity insurance for property owners and developers.
Indemnity policies are designed to deal with title defects for new developments and general property transactions where the title deeds specifically refer to what can and cannot be carried out at the property.
An indemnity policy may insure you as a potential home buyer against work done by former owners that could breach the legal title deeds of the property or cause issues later (i.e. when you sell the property). Restrictive covenants and access rights (see Types of Indemnity Policy below) are the most common title indemnity covers purchased.
Many insurers and brokers, including One Broker, offer a variety of policies specifically designed to address a range of title concerns that may arise during property transactions. These can be used by home buyers or sellers, property developers and homeowners.
Solicitors and conveyancers are increasingly suggesting that indemnity insurance is taken out during property transactions. It covers you and future owners or occupiers of the property and your/their mortgage lender(s), for any costs incurred for defending a third party bringing legal action or challenging the breach or defects in the home you are seeking to buy.
An easy example is an extension or modification, which has been completed correctly but without requisite planning permission or Building Regulation Completion Certificate. There’s no reason to think there will be a problem but, in this instance, an indemnity policy should cover any legal costs if challenged.
Indemnity insurance in house sales is often taken out when it would be costly or time-consuming to investigate the potential legal defect further (i.e. holding up the house sale unduly).
Generally, policies cover breaches or defects that are low risk or unlikely to happen but could be very expensive if they did occur.
A small house extension or modification without building sign-off or planning may not incur problems in the future but, if it did, the issue would be major.
Instead of undoing or ‘fixing’ the problem, an indemnity policy should protect you against someone challenging the changes made, which could be significant. A policy provides defence costs for the insurer to manage the claim on your behalf. It doesn’t have to be major building works either. Boilers and windows/doors that should have an installation certificate and don’t could be included in a policy.
Policies are tailor-made, depending on what cover is required, how much for and to what extent.
However, it’s worth noting these policies act as a legal expenses policy. They provide defence costs in the event of a third-party claim for the risk you are insured against. The policies do not insure the works or maintenance/repair costs. You would foot any costs relating to this.
An indemnity policy avoids the need to carry out research with any third parties about the risk that the cover is required for. In fact, if a third party gains knowledge of the risk, it may result in any claims made by those third parties being excluded. You may feel that it is in good faith to speak to neighbours but this would invalidate the policy if they made a challenge.
In most cases, they last forever. An indemnity policy is a kind of ‘one-off’ insurance, which remains in place, linked to a specific property rather than a person. In theory, it never needs renewing and you only pay once.
Does it transfer? Yes, any indemnity insurance clause covers any subsequent owners of the property/house too. And if you have a mortgage on it, the cover even extends to the lender.
Costs vary. They are worked out according to property price/value, rather than risk and start at £50.
Multiple indemnities may be arranged in one package, which reduces the cost, rather than having separate policies. Your conveyancer/solicitor may also charge an additional fee for arranging indemnity insurance for a house sale.
Most often it’s the buyer because they want the property and will benefit from the indemnity policy. However, it can depend on the housing market and the negotiating skills of the parties involved.
If the vendor is keen to sell and reluctant to see a potentially expensive sale fall through, they might agree to pay the policy premium. In some instances, both parties pay half each, asking the respective conveyancers/solicitors to work out the fine print prior to exchanging contracts.
Not long at all. Depending on the type of policy, One Indemnity can offer quotations within minutes. If a bespoke policy is required and an underwriter needs to review the request, it can take a few days to arrange.
Quite often the purchaser will be alerted to potential legal defects by the solicitor or conveyancer or lender. At this stage, they may suggest taking out an indemnity policy and can therefore arrange that in a timely fashion.
However, One Indemnity does find that seeking an indemnity policy can be the last request so we recommend that you confirm with your representatives whether cover is required at the earliest opportunity because it can hold up the transaction.
Absence of Easement (Access and/or Services) Indemnity: This can be taken out to ensure the continued right of access over the land of another, even if it’s unregistered. The main provision is you’ve used the access for the past 12 months. It is used by homeowners to ensure they can take legal recourse to defend existing access rights.
Mines & Minerals Indemnity: This protects purchasers, lenders and title successors against a third party claiming rights to exercise their perceived mines or mineral rights on land where your house or property is. Such buried minerals and resources include clay, stone, tin, lead, coal or gravel.
Restrictive Covenant Indemnity: A restrictive covenant is something agreed upon and put in place on the deeds of a property – usually governing the use of a property, e.g. restricting the number of dwellings on the site or the height or length of an extension. It might be that no building work is carried out, or simply that you can’t run a business from the premises. A Restrictive Covenants policy insures against incursions of restrictive covenants – known or unknown – in freehold property.
These are just some types of legal indemnity policy that pertain to individuals. Others include Aborted Planning Costs, Judicial Review and Right to Light, which are geared towards professional developers seeking Property Indemnity Insurance.
Discuss Indemnity Insurance with us today
One Indemnity provides a range of legal indemnity products, primarily aimed at property developers but also homeowners, buyers or sellers, covering a multitude of potential risks. Get in touch today!
5 Top Tips for Listed Property Owners
Our Home Insurance team shares its top tips for listed property owners, exploring the responsibilities of ownership.
What is Day 1 Reinstatement?
Join us as we explore the differences between reinstatement and day one reinstatement policies and what they mean for your property insurance.