If your house sale is being held up by defects in the title to the property, or where works have been undertaken to the property without the required planning permission or building regulations approval, then you may be asked by the buyer to take out legal indemnity insurance. If approved by the buyer’s conveyancer, then legal indemnity insurance may be taken out so that the sale can be completed.
Legal Indemnity insurance can be taken out during the conveyancing process to cover a whole range of problems relating to the building, title or deeds which can’t be rectified quickly, or at all. For most issues a quote can be obtained instantly however for more complex issues a quote for a bespoke policy would need to be obtained.
Although a policy covers the buyer (and lender), it’s generally taken out and paid for by the seller at the point of completion.
It involves a single payment and covers the issue for the life of the property, unless the policy is invalidated. The limit of indemnity on a policy is usually the sale price and some policies have an escalator clause whereby the level of indemnity rises. In the event of a future sale of a property, if there is no escalator clause in the policy a buyer or mortgage lender may ask for the limit of indemnity to be increased to the sale price at that time.
You should discuss your future plans for the property with your conveyancer before proceeding as Indemnity insurance is not always the best solution. When you’re buying property the conveyancing process can reveal all sorts of defects. If a mortgage is required, then a lender may insist on an indemnity policy being in place on completion.
What is indemnity insurance?
Indemnity insurance is used during conveyancing transactions to cover some sort of legal defect with the property which can’t be resolved swiftly, or at all. As an alternative to rectifying the defect, an indemnity insurance policy can be taken out, particularly when the buyer is otherwise satisfied with the property and simply wants to make sure their mortgage goes through smoothly.
The Council of Mortgage Lenders’ (CML) handbook for conveyancers says: “You must effect an indemnity insurance policy whenever the Lenders’ Handbook identifies that this is an acceptable or required course to us to ensure that the property has a good and marketable title at completion.”
The issues covered by indemnity insurance usually have a very low risk of causing any actual loss – but if they did cause a loss, it would be significant but buyers must always bear in mind that indemnity insurance does not remedy the defect, the defect will still be there but the indemnity insurance simply provides financial compensation in the event of the defect causing a loss.
Who’s covered by legal indemnity insurance?
Legal indemnity insurance will cover the buyer and the mortgage lender and anyone the property is sold to in the future (successors in title) in the event of any loss of value on the property as a result of the defect. Unlike other types of insurance which have an annual premium, indemnity insurance is paid as a one-off, is transferred to successors in title and lasts for the life of the property but it is very often that the seller pays for an indemnity policy.
Most policies cost in the region of a few hundred pounds, so most sellers will pay this rather than see a sale fall through. The level of the premium depends on the nature of the defect and the limit of indemnity which is usually the purchase price however, if the seller refuses to pay, the buyer may need to negotiate with them over who covers the cost, or else walk away from the sale.
Defects covered by indemnity insurance
Legal indemnity insurance can cover a whole range of defects with planning permission and building regulation issues probably being the most common. Below are some of the most common policies that are taken out.
Planning Permission/Building Regulations
When you’re buying a property, your conveyancer has a responsibility to make sure all relevant planning permission and building regulations have been obtained for any works that have been undertaken to a property. However, you need to bear in mind that all Indemnity insurance is invalidated if you reveal the defect to a third party, which in practice usually makes it impossible to remedy the defect without invalidating the insurance. For example, if a property has been built, altered or extended without building regulations or planning permission approval, then the local authority could take action to ask for it to be reversed or remedied. However, in most cases there’s a four-year limit on the local authority issuing an enforcement notice (ten years where the works are in breach of a planning condition), so if the work was carried out before this then the risk of any action is remote.
Buyers should bear in mind though that indemnity insurance is no guarantee that the work carried out is safe or satisfactory, so a prudent buyer should still consider arranging surveys and engineer reports for their own peace of mind.
Restrictive covenants are restrictions controlling the use of a property and are referred to in the title. On residential properties that could be anything from an agreement not to erect any outbuildings, to not keeping chickens in the garden. If you’re looking to buy a house where a covenant has already been broken – for instance an extension has been built in breach of a restrictive covenant a neighbour or other interested party could, in theory, insist that it’s removed but if the breach has been in existence for some time, indemnity insurance may be a solution to allow a house sale to go through. There may be conditions to the insurance, such as no dispute being currently ongoing, or the breach having been committed a certain time ago.
Absence of Easement
During the conveyancing process it may be discovered that the property is accessed over land that the property does not have a legal right of way over or there are insufficient rights for services which may cross neighbouring land. Indemnity insurance for an absence of easement will cover the cost of establishing easement, or the loss of value in the event access ever becomes an issue due to this lack of permission. The chances of this happening are usually remote if the property has had access that way for many years, or if the owner of the access land is unknown.
Invalidating indemnity insurance
All indemnity policies contain a clause that the insurance will be invalidated if the existence of the problem is revealed to third parties and this means in practice it makes it impossible to remedy the reason for taking the insurance without invalidating the insurance.
For instance, if you had indemnity insurance for an extension built without planning permission and took out indemnity insurance, if you then sought to obtain retrospective planning permission you would invalidate the insurance, even if planning permission were denied.
This means that it’s a good idea to discuss your future plans for the property with your conveyancer as if you planned to carry out work to the property in future, you could invalidate the indemnity policy by inviting the planning department to inspect your property for the new work. Indemnity insurance may not be the right solution for you, and you might be better off asking the seller to complete the time-consuming process of obtaining planning permission retrospectively – or simply walking away from the purchase.
There are a whole range of indemnity policies available to cover different risks for which instant quotes can be obtained online. However, for more complex issues, it may be necessary to approach a few insures for a bespoke policy. All insurers assess risk differently and the premiums can vary significantly between different insurers particularly for a bespoke policy. Although most defects can be covered by indemnity insurance, in some cases the underwriters of the insurers decide that they are not prepared to offer any indemnity insurance if based on the facts the risk is too great although some will agree to offer indemnity insurance in this case but with an increased premium.
The alternative of course to indemnity insurance is to try and remedy the defect if this is possible but in most cases it is likely to be much more expensive and time consuming than taking out indemnity insurance, can open up a can of worms and by trying to remedy the defect without success it could mean that it would then be impossible to then take out indemnity insurance.
On a positive note, there are not many claims on legal indemnity policies which is why the premiums are low in many instances.
This article was written by Louise Crockford, an Associate in the Property Department at WBW Solicitors in Launceston. If you would like to speak to Louise about any of the issues raised in this article, then you can contact her by telephone on 01566 771102 or by email email@example.com. WBW has has nine offices across the South West in Newton Abbot, Bovey Tracey, Torquay, Paignton, Exeter, Launceston, Exmouth, Sidmouth and Honiton.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.