You are selling your property and your solicitor advises you that an indemnity insurance policy is required. So, what are indemnity insurance policies? What do they cost? What do they cover? And, whose responsibility is it to put a policy in place?
What are indemnity insurance policies?
Indemnity insurance policies are commonly used in property transactions to provide protection in situations where the legal position is either unclear or not fully acceptable to a purchaser or mortgage lender.
Indemnity policies can be a quick way of resolving legal issues to everyone’s satisfaction, so are frequently used to speed up the conveyancing process. Depending on the defect, insurance quotes are usually given within a day or so and the policies can be taken out quickly.
The policy, depending on the wording, may cover future owners of the property and their mortgage lenders, although the precise wording of the policy should be checked.
What do they cost?
The cost varies according to the value of the property, its use and the nature of the risk. Usually a single upfront premium is paid on the day of inception of the policy and there are no later regular instalments to pay.
If the value of the property increases, the policy usually allows for an incremental increase to the cover provided. If however, you are selling a property which has the benefit of a policy and the value of the property has increased significantly, policies can be topped up and a smaller ‘top-up’ premium paid.
What do they cover?
The insurance will usually cover both the purchaser and the mortgage lender in the event of any loss of value in the property as a result of a defect.
Policies do not cover the full cost of rectification should a claim arise. They only cover the loss in value of the property due to the existence of the defect and costs and expenses arising in defending a claim by a third party. If for example, a structural alteration has been carried out to a property and the seller cannot find the Building Regulations completion certificate – an insurance policy will provide cover if the local authority take action for the regulations not being complied with. The policy will not automatically make the alterations ‘legal’ or ‘structurally sound’ – but it will be a quick way to resolve the legal position.
Common uses of these policies are:
- Chancel Repair Liability – Where a chancel repair search reveals that the property is in an area which has chancel repair liability. (Chancel Repair liability is the liability to pay towards the upkeep of the local church chancel and will affect all properties in the district).
- Title Indemnity – Where there is a defect in title e.g. the property does not have the benefit of registered Title Absolute (the best class of title available) or is unregistered and original documents are missing.
- Right of Way Issues – Where the property does not front directly on to a public highway and there is no legal right of way connecting the property to the nearest public highway.
- Lack of Planning Consents/Building Regulation Approval – It is not always possible to ascertain whether works have been carried out in compliance with planning consents and/or building regulations. This may be because copy documents are not available or if there is some uncertainty as to whether consents were necessary.
- Unknown Covenants – If the Land Registry do not receive copies of all documents referred to in the deeds at the time a property is registered for the first time, a note will be put on the register that there may be covenants affecting the property details of which are not known. (Covenants are obligations to do / not do certain things and usually affect all owners of the property, even if they were not the original covenanting party). This policy will be requested to cover the position should a third party appear claiming the benefit of covenants over the property.
- Lack of Searches – When a property has been in the control of the client and a transaction arises where searches would normally be carried out (for example, on a re-mortgage) most mortgage lenders will accept a lack of search policy instead of requiring the full range of Conveyancing searches to be carried out.
- Search Validation – Where the usual Conveyancing searches have been carried out on the property and due to delays, they are over three or six months old. The policy provides cover against the event that a new adverse entry would have been revealed had the searches been done again.
Whose responsibility is it to put a policy in place?
The initial starting point is that it is the seller’s responsibility to deduce clear title to a purchaser on a property sale. Therefore, the onus to put in place and pay for an indemnity policy usually falls on the seller. However, having said that, if the purchaser is keen to complete or it is the purchaser’s mortgage lender that is in insisting on a policy – the purchaser may decide to take a commercial view and pay for the insurance. It is often up to the bargaining strength of the parties and it is common to reach a compromise where both parties split the cost.