What is Indemnity Insurance when buying a house?

When buying or selling a house, your conveyancer may use the term ‘indemnity insurance’ without explaining its meaning.

Commonly purchased during housing transactions to cover a variety of risks, indemnity insurance policies are there to proctect you.

In this article we explain what indemnity insurance is. We also look at when and why you might need it.

What is indemnity insurance used for in house sales?

An indemnity insurance policy protects you against the costs of a third party making a claim against you following a legal fault when buying or selling property.

Each policy protects against a specific potential problem that could cost you substantially in the future. These legal defects can be things like problems with the deed, planning permission issues, or missing paperwork, all of which could potentially lead to a huge bill.

Typically, you would use indemnity insurance to cover legal defects which would be either very costly, or very time consuming to fix, but are low risk and are therefore unlikely to ever actually cause a problem.

Indemnity insurance would only protect you against costs and damages caused by legal claims. It would not cover any repair costs or the costs of any fines or penalties.

Normally indemnity insurance lasts in perpetuity, and stays with a property, passing from one owner to the next.

Do I need indemnity insurance?

If there are any legal defects with your property you are likely to need indemnity insurance. These will become apparent as your conveyancer takes you through the legal process of buying or selling a property.

These legal defects should be indicated by your conveyancer based on their analysis of the TA6 form. They can include things like problems with the deed, missing paperwork, missing planning permission and missing or late searches.

Mortgage lenders will refuse to let buyers borrow money against a property until such defects are resolved. Most conveyancers will also strongly suggest not to buy a property without a solution to problems such as these.

Getting indemnity insurance to cover each legal defect can be a good way to resolve such issues quickly. If an outside party decides to sue over one of the defects, the insurance policy should pay out and cover your costs.

Reasons why you might need indemnity insurance

There are a lot of potential issues that can come up when buying a property which can make the purchase of indemnity insurance a ‘no brainer’. Here are the four most common issues:

1. You are missing paperwork for building or repair works

One of the most common reasons to buy indemnity insurance is to cover building work with missing documents.

Indemnity policies are usually bought to cover missing building control completion certificates, self-certification certificates or work which does not have planning permission. Usually, each missing document will require a separate policy.

Building Regulation completion certificates are issued by building control surveyors to demonstrate work has been carried out to a safe standard. Similarly, boiler engineers, window specialists and electricians can join schemes which allow them to self-certify their work, FENSA being a good example of this.

Planning permission, on the other hand, controls the use and appearance of a property. While in some areas, some development without express permission is permitted (called permitted development), this is not the case everywhere or for much in the way of substantial construction.

If either planning permission or building regulations approval is missing for work carried out on a property, it is vulnerable to the local authority issuing an enforcement order. This means they can order you to have work rectified, modified, or even demolished if it lacks the correct paperwork.

As a buyer, the reasons you would want indemnity insurance in cases with missing documents is to protect you from the costs caused by local authority enforcement action. While it might never happen, if it does this could be very expensive. For example, if you have bought a house which has previously been extended without planning permission, it would cost you a lot of money if the local authority ordered the extension to be torn down – not to mention substantially reducing your property’s value.

Note that this type of indemnity insurance can only be bought a year after the completion of the work in question. This is because prior to this point the local authority can issue an order against it without having to go through the courts.

2. You are subject to a restrictive covenant or lack an important easement

Often, older properties have restrictions in their deeds determining what you can do with them. These are called restrictive covenants. They can date from centuries ago and include things like bans on construction, business, or livestock or requiring you to grant access to a neighbour.

If you are buying a property where the previous owners have breached a covenant without a charge being levied against them, you can buy indemnity insurance to protect you from any legal problems this breach may cause you in future.

In addition, indemnity insurance can help you if this situation is the other way round. An easement is essentially the opposite of a covenant, and gives the owner of a property a right over another property. These are often used for access rights.

If you are using another person’s property to access your property but you have no easement in place allowing this, you can buy indemnity insurance to protect you from financial losses caused by them preventing you from doing so.

3. Your property is suffering from title issues

While ideally, every property would have a perfect absolute title, unfortunately this is not always the case. Many properties in England and Wales are held under possessory titles or good leaseholds.

Possessory titles are created when an applicant registered a title with the Land Registry while providing insufficient documents to prove they owned it. This status can either be caused by a lost title deed, or because the land was acquired through squatting on it.

If someone emerges with a title deed to the property, they can challenge the possessory title holder’s ownership and occupation.

After 12 years with no challenges, this type of title can be upgraded into an absolute title.

Rarer than a possessory title, a good leasehold is created when a leasehold interest in a property is registered, while the freeholder is unknown. Often this can occur when the freeholder has not registered their land with HM Land Registry. If it emerges that the person who granted the lease had no right to do so, this can cause the leaseholder very serious problems.

Generally, you will want indemnity insurance if you hold a property through either of these title types. This type of insurance will cover your legal costs and pay out the full value of the land if a newly emerging ‘paper owner’ makes a claim for it.

4. Your property searches are missing or late

Sometimes, issues at the relevant authority can cause a conveyancing search to be substantially delayed. This could be past the point in time when the parties involved in the transaction need the exchange of contracts to take place.

In these circumstances it can make sense to buy an indemnity insurance policy to cover the missing search. You can buy a so called “no search indemnity insurance” to cover a variety of missing searches, including local authority searches, mining searches, water and drainage searches and chancel liability searches.

This type of insurance will cover any loss in property value and any expenses arising from matters which would have been revealed had the search taken place.

Is indemnity insurance my only choice?

Normally, your conveyancer will simply advise if you need to purchase indemnity insurance and how to proceed. You should ask them to ensure that there is no free way around an issue before you purchase an expensive insurance policy.

For some issues, it is a much better idea to fix them than to insure against them. For example, gas and electricity safety, or structural issues all pose dangers to buildings occupants but an indemnity policy would not cover this. Instead, you would arrange a gas and electrical safety certificate rather than relying on indemnity insurance to protect you against something going wrong with your home.

For other issues, buying a policy pretty is often your only choice. For example, when buying a property with a possessive title it can be impossible to find the title documents required to upgrade it, as they may not even exist.

Who pays for indemnity insurance?

The short answer is it depends.

Given the buyer benefits from the insurance rather than the seller there is a good argument it is the buyer’s responsibility. This is especially the case when an issue has been present for many years.

Alternatively, when the issue results from something the seller has done, such as employing less than perfect builders or disregarding a covenant, they will normally be expected to pay for insurance to cover this.

Often, who purchases the indemnity insurance is decided through negotiation, depending on who has the strongest position.

Your conveyancing professional should help you with these negotiations. They may be able to help determine how strong your negotiating position really is.

How much is indemnity insurance?

The price of indemnity insurance varies a lot depending on the risk you are insuring against.

Some risks are substantially cheaper to ensure against than others. For example, some companies charge as little as £12 to insure a window without a FENSA certificate against future enforcement action.

Other types of indemnity insurance can be considerably more expensive. If you wish to protect your property against chancel repair liability, this can cost you around £200, while insurance against enforcement due to missing planning permission or building regulation’s approval can cost you substantially more. This could be as much as £500 per document, depending on the value of your property.

You will probably not be able to negotiate for a cheaper indemnity insurance policy. This is because indemnity insurance policies are only offered by specialist providers. Your conveyancer may charge you a fee for arranging cover. Ensure that you ask for the whole quote in order to avoid hidden charges.

Note that while most insurance policies charge an annual premium, indemnity insurance is a one-off payment for the term that you own the property.

Can I invalidate my indemnity insurance?

Yes!

It is a common clause in indemnity insurance policies for them to become void if the problem it relates to is revealed to a third party.

For example, if you take out a policy to cover an alteration to a building constructed without planning permission, applying for retrospective planning permission from the local authority would void your policy.

This makes sense, as the policy is only low risk because the chances of anyone at the local authority finding out about the planning or building regulations breach is very low. By notifying them of your actions, enforcement is much more likely.

Conveyancer’s indemnity insurance

Your solicitor or licensed conveyancer will also have professional indemnity insurance. This is not the same as the indemnity insurance you buy during a property transaction.

However, if your conveyancer makes a mistake with your conveyancing which causes you financial harm, you can go to the legal ombudsman for recompense.

This mistake could be a missed deadline, incorrect advice, or failing to follow instructions.

In Summary

Indemnity insurance can be a useful tool for protecting yourself against niggling legal defects a property may have.

It can protect property owners from legal challenges from a third party, be it the local authority, a covenant holder, or even a long-lost freeholder. It can also allow a sale to go through without all of the necessary searches.

For some issues, such as problems with a title deed or missing planning permission papers, indemnity insurance can be the easiest, best, and sometimes the only solution.

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