During the due diligence process when purchasing a property, your solicitor may identify issues with the property which could be troublesome in the future or could even lead to costly financial consequences in the future.
Indemnity insurance is a protection policy that covers the financial implications of a third party making a claim and therefore, indemnity insurance plays an important role when insuring against these risks as it is a one-off payment. Additionally, the policy can usually be passed on to any future purchaser meaning that there should not be any protracted delays or increased costs when you come to sell the property.
What Does Indemnity Insurance Cover?
There are a number of reasons why someone would need indemnity insurance:
1. Planning permission
If the property has been altered without the necessary planning permission or building regulations.
2. Restrictive covenants
Indemnity insurance may be required if a restrictive covenant has already been breached. For example, if a restrictive covenant prevents alterations to the property but the property has an extension.
3. Good leasehold title
Good leasehold title is awarded where not all of the documents for the leasehold title have been produced to the Land Registry, for example the freehold title. Indemnity insurance protects against the risks of good leasehold title such as not being aware of restrictive covenants or the landlord not having the power to grant the lease.
4. Adverse possession
Adverse possession is when the property only has possessory title to the land. This is the least desirable title you can hold and can often mean lenders are not willing to lend on a property which only have possessory title. Indemnity insurance can cover the purchaser or lender against financial losses that may be suffered if someone attempts to claim the land.
5. Flying freeholds
A flying freehold is when the freehold property overhangs or projects under another. Indemnity insurance can cover the risk of being unable to access the adjoining property to carry out repairs.
6. Absence of Easement
If you have to cross another person’s land to reach your land but have not been granted a ‘right of access’, indemnity insurance can protect against any financial losses which may occur.
Who Pays for Indemnity Insurance?
The buyer or the seller of the property have the option to pay for an indemnity policy. Often, the buyer’s solicitor will insist the seller pays for indemnity insurance before proceeding if a potential risk has been revealed. This is because the need for the indemnity insurance is due to a defect of the property which the seller must therefore “correct.”
Do I Need Indemnity Insurance?
Deciding whether indemnity insurance is required is an important step in protecting you against any financial loss. Although the defects are often low risk, indemnity insurance is an inexpensive way of protecting you against an unexpected cost in the future. Indemnity insurance can also prevent delays in transactions for legal defects that would be expensive, time consuming and sometimes impossible to resolve. The property may have an existing indemnity policy but it is important to ensure the policy remains adequate, contains no significant exclusions and reflects the current market value of the property.
Despite the benefits of indemnity insurance, it is important to be aware that it does not solve the defect – it is an indemnity against the loss. It is crucial to discuss whether indemnity insurance is an appropriate route to protecting against the relevant risk. If you require legal advice regarding indemnity insurance when selling or purchasing a property, please get in touch with one of our specialists at Farleys. You can call us on 0845 287 0939 or contact us by email.