Indemnity insurance provides protection during house sales.
But much of the population still don’t understand indemnity insurance.
So, what exactly is it, and when might you need it?
In the blog below, we’ve explained indemnity insurance. Keep reading for everything you need to know.
What is indemnity insurance?
Indemnity insurance covers legal costs. It also covers potential damages from legal issues with a house.
It protects the owner from expensive bills if a problem in the future relates to an issue that existed when buying the property.
A common examples is alterations made without planning permission. The local authority can act in this scenario.
Indemnity insurance would cover the legal costs and potential damages involved with this.
Is indemnity insurance a kind of home insurance?
Although both are commonly used in property, indemnity and home insurance are different insurance categories.
Indemnity insurance covers professional errors or negligence and home insurance covers damage to properties and possessions.
What does indemnity insurance cover?
An indemnity insurance policy covers the legal costs if someone sues you. The exact risks covered depend on the individual policy taken out.
Some common examples include:
- Missing paperwork, such as building regulation certificates or planning consent for alterations
- Restrictive covenants limiting how the property can be used or prohibiting certain activities
- Rights of access over the property land for neighbours or utilities
- Issues where a freeholder cannot be traced, so ground rent obligations are unclear.
The policy provides a safety net to cover legal costs. It also covers potential damages if a historical issue leads to action.
Yet, it does not cover the cost of remedial work required to fix any non-compliant alteration.
An indemnity policy covers the legal owner of the property when bought. This includes individuals named on the property deed and mortgage lenders if the property is mortgaged.
Banks and building societies often need indemnity insurance for known issues. This protects their interests. They may be joint policyholders.
An indemnity policy will cover all named legal owners if the home is joint owned. But, cover usually excludes any known breaches caused by the policy holder themselves.
How much does indemnity insurance cost?
Costs for indemnity insurance vary. It depends on the specific policy and level of cover required.
Typical costs range from £20 up to around £300 for cover of a few tens of thousands of pounds. More significant risks or higher cost levels increase costs above this.
The cost depends on several factors:
- The value of the property – insuring a higher value property costs more
- The scope of cover – whether legal costs only or damages awards as well
- The amount of cover provided – policies have an upper limit on the payout
- The insurer’s assessment of the risk level.
So, a modest policy for a low-risk issue on a lower-value property could cost less than £100. But, for a serious breach on a high-end house, you could pay more than £1,000.
Getting accurate quotes is essential. Conveyancers can access specialist broker panels to find suitable cover.
How to get indemnity insurance
If there’s an issue during the conveyancing process, speak to your solicitor. They will gather prices for suitable indemnity cover.
Review the conveyancer’s recommendation. Then confirm if you are happy to proceed.
The best way to get indemnity insurance is through your conveyancer. They can arrange the policy through their contacts.
You can also request details of the policy and approach brokers yourself.
Common indemnity insurance policies
Some of the most common indemnity policies taken out during property transactions include:
- ‘Planning permission’ indemnity covers alterations or extensions done without permission. It will cover enforcement costs but not the cost of remedial work.
- ‘Building regulations’ indemnity covers when sign-off and completion certificates are missing. It protects if paperwork errors lead to enforcement action.
- ‘Restrictive covenant’ indemnity covers legal costs. This is if historic restrictive covenants on a property are triggered. It seeks to control the use of the land or property.
- ‘Access rights’ indemnity covers if someone gets right of access on your land. This is usually when none currently exists.
- ‘Chancel repair’ liability covers potential costs. This is if the Church of England seeks to enforce chancel repair liability on a property.
- ‘Adverse possession’ indemnity protects you if a third party makes a legal claim. This is based on long-term adverse possession rights.
- ‘Missing deed’ indemnity covers issues relating to lost or destroyed titled deeds.
If you need details on the specifics of any of these policies, speak to an expert who can guide you.
Do I need indemnity insurance?
Indemnity insurance is not required for most property transactions.
Your conveyancer will only recommend it if a specific issue arises that presents a legal risk that the buyer is not willing to accept.
These issues could include:
- Missing paperwork for alterations
- Unresolved boundary disputes
- Potential breaches of restrictive covenants.
If the risk of future enforcement action is low, many buyers may proceed without indemnity insurance.
They may negotiate a price reduction with the seller to account for the potential risk. Or they may choose to take on the risk themselves.
Can an existing indemnity policy pass to a new owner?
Yes, existing indemnity policies can pass on to the new property owner.
The cover protects the property’s legal owner against the specific breaches or risks covered within the property.
You should check the terms. Some policies have exclusions if a new owner makes significant improvements or alterations. Especially if it impacts the original breach.
