What is Indemnity Insurance?
29 March 2017
Before you agree to purchase or accept indemnity insurance, you should speak to your Property Lawyer to understand any risks.
Legal indemnity insurance is obtained in order to offer protection to a buyer (and a lender) where there is a defect in the title which cannot be resolved. In theory indemnity insurance should only be used as a last resort, however in practice it often provides a quick and low cost alternative to the work required to correct a defect.
Unlike a conventional insurance policy, the premium for a legal indemnity insurance policy is paid only once, and in most cases is automatically transferred to successors in title. The limit of the cover will be the purchase price of the property. Since the indemnity policy will not be index linked, a premium will usually need to be paid by the insured when they come to sell in order to increase the limit of cover (assuming that the property is sold for a profit).
Legal indemnity insurance does not remedy the insured defect, but merely offers financial compensation should a claim be brought in the future. Each condition of the policy should be checked by your Conveyancing Lawyer to ensure that it is “fit of purpose”, that there are transparent and clear conditions, and that you understand what may invalidate the cover. There is a standard condition that the existence of the policy must not be revealed to third parties.
The usual process is that the buyer’s Lawyer will raise enquiries on the title, which may result in a defect being uncovered, such as changes made to the property without building regulations or a lack of a right of way over an area of land. The seller’s Lawyer will discuss the enquiries with the seller and attempt to rectify the matter to the buyer’s satisfaction before the exchange of contracts. Where the problem relates to a right of way, the matter may be resolved by reviewing the Title Deeds to confirm the right of way is in existence, or obtaining supporting documentation from neighbours that the right has been accessed and used uninterrupted for many years.
If the buyer’s Lawyer is happy with the additional information, they will be able to proceed and provide an unqualified Certificate of Title to their client’s lender, and request mortgage funds to enable them to continue with the transaction. If however, they are not prepared to accept the additional evidence, they may insist on indemnity insurance to protect their client and the lender. If the lender adopts the Council of Mortgage Lender’s Handbook, the requirements around indemnity insurance are set out clearly, including what is accepted and what should be referred to the lender for further action.
It’s worth noting that indemnity insurance is not acceptable on all title/property defects. On occasion the buyer and lender may not accept insurance and will instead seek different alternatives. An example would be retrospective consent for lack of planning permission. The seller’s Lawyer will discuss the defect with their client and the process for obtaining indemnity insurance, together with the fee payable, before being in a position to proceed.
Legal indemnity insurance should only be obtained where there is a clear defect and risk which cannot be resolved by the Conveyancing Lawyers. From a seller’s point of view, it will usually be cheaper and quicker to agree to indemnity insurance rather than paying additional fees to rectify a title/property defect. From a buyer’s perspective, they must discuss the situation with their property Lawyer and have a clear understanding of the potential risk before they proceed.
It is usual practice for a seller to pay the premium, however this can be negotiated. If the seller does pay then the buyer will be responsible for any increased premium should they sell in the future.
If a defect in the title is discovered, your Conveyancing Lawyer will explain the positon prior to exchange of contracts. This will include an explanation as to why there is a defect in the title, what can be done to rectify the matter and if indemnity insurance is required or not. Your Conveyancing Lawyer will explain how indemnity insurance works, who it will protect, the conditions of the policy and the premium. You should not buy or agree to anything until you have obtained this legal advice.