What is an indemnity policy and do I need one?

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What is an indemnity policy?

As a buyer, your conveyancer’s role is to conduct fact-finding on your behalf. This includes investigating the property title for any ownership issues, conducting third-party searches, and requesting information directly from the seller’s solicitors.

It is to make sure you are fully aware of the responsibilities and liabilities that come with your property, and to ensure you are not left dealing with the costs of something that happened to the property in the past. However, sometimes certain ‘grey areas’ remain. For example, the paperwork granting building regulation consent for a completed extension is missing.

Or, in other situations, your conveyancer may have submitted a search to the local authority, but delays in receiving the results might jeopardise the whole transaction. This is where an indemnity policy comes in. This type of insurance offers you protection against the costs of legal liabilities that you could find yourself facing in the future.

What does an indemnity policy cover?

It is important to know that indemnity insurance will protect you against costs that might arise because of a problem with the property. However, it generally won’t cover the costs of fixing the underlying problem.

As an example, let’s say it comes to light that there’s a defect in your property extension which means it doesn’t comply with building regulations. You can’t claim on the policy to have the problem fixed. You can, however, rely on the policy to cover the costs of enforcement action taken by the local authority for breach of the regulations.

Why do you need an indemnity policy?

Conveyancers generally recommend taking out an indemnity policy when there is no easy or practical way of fixing a particular issue.

Often, a policy is needed because of uncertainty: i.e. where it’s possible that you could be faced with a liability, but an absence of information (e.g. missing certificates) means there’s no way of knowing for definite at this stage.

Time is the other key reason for taking out a policy. While it may be possible to search harder and wait for information to come through, doing so could cause severe delays to the transaction. A policy can protect you while also keeping things moving.

The types of indemnity policy

Common types of cover include the following:

Search indemnity cover

Local authority searches reveal information such as planning applications relevant to the property, building control history, and development restrictions. Sometimes these searches only take a few weeks. However, especially in light of COVID-19 disruptions, a number of councils are taking several months to process search requests.

If waiting for a local authority search is going to significantly delay everything, a local search indemnity policy might be appropriate. This policy covers the risk that something negatively affecting the property’s value would otherwise have been revealed in the search results.

Planning permissions and building regulations cover

Work has been carried out on the property, but the relevant approval and compliance records cannot be located. This type of indemnity policy protects you against the local authority taking legal action for breach of planning permission rules or building regulations.

Absence of easement cover

If the only way possible to access part of your property (drains, for example) is by crossing into a neighbour’s garden, you’ll need a right of access (known as a ‘Right of Easement’). But, it can sometimes be unclear from the title records whether such a right exists. An absence of an easement policy means you will cover any costs if a neighbour tries to block your access.

Adverse possession cover

Let’s say the property you want to buy includes a large stretch of garden. The seller claims ownership over this land, but doesn’t have the necessary evidence to satisfy the Land Registry that they are the true owner. Under the ‘adverse possession’ rules, to claim ownership, they must have occupied the land for at least the last 12 years. However, for a further 12 years, it may still be possible for someone else to take the land if they can show a stronger claim of ownership.

If someone makes such a claim, an indemnity policy covers the costs of defending it.

Restrictive covenant cover

A ‘restrictive covenant’ is a private agreement between property owners, in which one party agrees not to do something for the benefit of another. Some examples include agreeing not to extend the property or not to convert a single dwelling into individual flats.

Where a previous covenant has been breached, and if that breach is less than 20 years old, there may be a risk of the beneficiary property owner attempting to enforce the covenant. Indemnity insurance covers the cost of defending such a claim.

Flying freehold cover

‘Flying freehold’ is when a section of your property extends above or below a neighbouring property: for instance, a balcony that protrudes over your neighbour’s flat. Maintenance of it might require access onto your neighbouring property from time to time, or you may be dependent on your neighbour to ensure structural support.

It’s not always clear from the title documents whether you have the right of access, along with the other rights necessary to keep this section of your property in good condition, so a flying freehold indemnity policy can cover you for this.

Good leasehold title cover

Ideally, when you are buying a leasehold title, it will be classed by the Land Registry as an absolute leasehold, which means it cannot be challenged.

However, some leasehold properties are considered to have good leasehold titles. This means that whoever registered the property was able to prove title to the lease, but was unable to provide deeds showing that the landlord (the freeholder) was entitled to actually grant that lease to them.

Good leasehold title insurance covers you in the event that someone attempts to claim that no valid lease was originally granted.

How much does an indemnity policy cost?

The cost of an indemnity policy depends on the type of insurance you need and on the value of the policy. For example, policies for good leasehold title cover start at around £20, while building regulation indemnity insurance can cost a couple of hundred pounds.

It is important to note that it is often possible to negotiate with the seller to have them pay, in whole or in part, for the policy, especially if the need for the policy stems from a failure on their part, such as losing the compliance certificates.

For more information on all aspects of conveyancing, head over to our information hub. You can meet our team of conveyancers here. For a quote, get in touch today.