Legal Indemnity Insurance is a specialist type of insurance policy, often used by Conveyancers where there is an issue with the legal title to a property, or where documentation necessary to meet a mortgage lender’s requirements is missing.
Such insurance is designed to provide cover for potential financial loss or liability, should the ‘Insured Party’ face a challenge or claim for the ‘Insured Event’. The ‘Insured Party’ will often be the owner or owners of the property and/or their mortgage Lender. There are lots of different indemnity insurance providers covering a whole host of ‘insured risks.’
Lawyers often use such policies where there are issues relating to the legal title to a property, or where works have been undertaken to a property which required some form of consent, permission of certification which the owner did not obtain.
Often such policies are needed to satisfy a mortgage lender before they will allow mortgage monies from that lending institution to be used to buy or re-mortgage a property, where the Legal Title or documentation to the property is not quite as it should be.
Legal Indemnity Insurance has some significant limitations:
What these policies DO NOT do, is actually ‘fix’ the underlying title defect, issue with missing documentation, remove structural problems or pay for remediation of shoddy workmanship. They do not perfect a defective title. They do not render alterations that did not have requisite Planning Permissions, Building Regulation Approval or other necessary Certification/ consent safe. They are not designed to pay out compensation if a property suffers catastrophic structural failure where Planning Permission/Building Regulation Approval was needed, was not obtained and there is then a major structural problem. Clients need to take professional advice from a Structural Surveyor to satisfy themselves of the structural stability of any unauthorised alterations.
Further, modern mortgage lenders are constantly amending their lending criteria. A transaction that is enabled to proceed with an Indemnity Policy today, is not guaranteed to be able to proceed at any point in the future if the owner subsequently wishes to sell or re-mortgage the property. This means if a property has increased significantly in values, or if further alterations have been undertaken at a property, an existing Indemnity Insurance policy may need to be amended, a further Indemnity Insurance policy may be needed, or, in some cases, Indemnity Insurance may be totally inadequate for future lending purposes and the owner may have to embark on actually ‘fixing’ the problem they originally insured against, which could be both costly and time consuming.
A client may find that when they are selling a property they are asked to ‘top up’ the indemnity policy that was provided to them upon completion of their purchase. Commonly Indemnity Insurance policies are taken out to the purchase price value of the property upon completion. Some policies are index linked to RPI for a defined time period, however, property prices can rise significantly more than in accordance with the RPI. This is where a ‘top up’ to an Indemnity Policy might be required.
Wherever an Indemnity Policy is used, our clients do need to understand that there are some serious limitations as to the extent of cover offered by any Indemnity Policy.
Common issues where we see Indemnity Insurance being used include:
- Breach of Covenant that is less than 20 years’ old. A ‘Covenant’ is a promise to do, or a promise not to do something. E.G., a restriction in the title deeds which says no alterations are permitted to a property without getting the original builder’s written consent, in addition to any Planning Permission or Building Regulation Approval that may be needed. Restrictive Covenants are more common in Leasehold Properties and newbuild properties but can affect any property.
Enforcement action cannot be taken after a period of 20 years has elapsed, so if the alterations are less than 20 years old, Indemnity Insurance may be needed in case the original party who should have been asked for consent seeks to take action against the current owner of the property.
- Unauthorised alterations that required but do not have necessary Planning Permission/Building Regulation Approval. E.g. loft conversions. ( Permissions from the Local Authority are distinct from and Covenant permission that may be needed)
Enforcement action cannot be taken by the Local Authority after 10 years have elapsed, save in exceptional circumstances.
- Other installations that required Certification but do not have it e.g., replacement windows and doors- need a FENSA Certificate or Building Regulation Approval, Wood Burners- need HETAS Certification, Gas/electrical installations require Competent Person Installation Certificates.
- Lack of rights that a property needs to be able to be used to its full potential, E.G. where there are pedestrian rights to access the front of the property, but no vehicular rights and the owner needs the right to drive a car up to and onto the land forming part of the title to the property.
If Indemnity Insurance is relevant to a client’s transaction, our client will be provided with a copy of the draft policy together with a Demands and Needs letter. This letter will tell our client the cost of the policy and, if applicable, our costs for arranging or approving it. The letter will also explain why the policy is needed and what it will cover in the event of a claim being made. As referred to above, it is essential our clients understand the limitations of any indemnity policy that is suggested during a transaction. If anything is at all unclear, our client should raise this with the Lawyer who is acting for them.
Shhhh!
It is usually a condition of such policies that NO ATTEMPT is made to contact the party that could pursue enforcement action – e.g. the entity that benefits from the Restrictive Covenant that has been breached, or the Local Authority if there has been an alteration without necessary Planning or Building Regulation approval. If contact has been made/attempted, then this may invalidate a potential indemnity policy.
How can Talbots Law help?
Need advice about indemnity insurance for your property transaction? Get in touch with our Conveyancing Team today. Call our team on 0800 118 1500 or complete our form below.
Disclaimer
The contents of this blog or any other published by Talbots Law cannot be considered as legal advice. You should take no action without prior consultation with a qualified solicitor or legal professional. The contents of this blog refers to the process in England and Wales.