As a buyer, your conveyancer’s job is to gather information on your behalf. This involves looking into the property title for any concerns with ownership, doing searches with third parties, and seeking information directly from the seller’s solicitors.
It is to ensure that you are fully informed of your property’s responsibilities and liabilities and that you are not left dealing with the costs of something that happened with the property in the past. That’s where indemnity policy comes in. Read on to learn more about the cost of an indemnity insurance policy and who pays for it.
What is an Indemnity Policy?
In layman’s terms, an indemnity policy is an insurance policy that covers a property defect. Such policies are frequently used to protect against the financial consequences of a third party filing a claim against the faults. They are typically requested by a solicitor acting on a property transaction when a potential danger is disclosed, particularly when the buyer requires a mortgage.
An indemnity policy is a one-time payment that protects the property and is thus transferable between owners. The policy will be in effect for many years; the exact length will be determined by the insurer.
When a policy is first put in place, the limit of indemnity should be equal to or greater than the purchase price of the property. The policy will clearly state this. If the property is later sold for a higher price, the indemnity maximum may need to be increased, with an additional premium due. However, for the first few years of the policy’s term, many insurers automatically increase the limit of indemnity by a certain rate.
When do you need an Indemnity Policy?
Indemnity policies cover a wide range of risks, with the most frequent policy being a lack of Building Regulations or Planning Permission. This would cover the cost of any work that would be required if the Local Authority served enforcement requiring the owner to change or remove any work that did not conform with Planning Permission or Building Regulations.
Other prevalent policies are as follows:
- Restrictive covenant: necessary when a restrictive covenant in the property’s title has been violated.
- Missing data: essential when key documents carrying unknown restrictive covenants or restrictions have been misplaced.
- Absence of easement: required when there are no legal rights of way or connections to services.
Absence of a build-over agreement: required when no consent from the local authority has been obtained for building works to be placed over a sewer or pipe.
This is not an exhaustive list, and there is additional indemnity insurance available.
What are the Advantages of Purchasing an Indemnity Policy?
Indemnity plans are a straightforward solution for resolving property-related concerns. They provide a rapid solution to the sometimes costly and time-consuming procedure of contacting the appropriate third party in order to receive the necessary cure.
The purchase price of the property and the risk that the policy is protecting against will determine the policy’s cost. Policies might cost anywhere from £50 to £200. However, this is frequently regarded as a small price to pay in order to secure a sale.
Types of Indemnity Policy
The following are examples of common forms of insurance coverage:
#1. Search indemnity insurance
Local authority searches provide information such as pertinent planning applications, building control histories, and development limits. These searches can sometimes be completed in a matter of weeks. However, because of the difficulties caused by COVID-19, a lot of councils are taking many months to execute search requests.
If waiting for a local authority search may cause considerable delays, a local search indemnity policy may be recommended. This policy protects against the danger of something negatively influencing the property’s value that would otherwise have been shown in the search results.
#2. Building rules and planning permissions cover
The property has been worked on, but the required approval and compliance paperwork cannot be found. This form of indemnity policy protects you from legal action by the local government for violating planning permit laws or building standards.
#3. Absence of easement cover
If the only way to access a component of your property (for example, drains) is to pass into a neighbour’s garden, you’ll need a right of access (also known as a ‘Right of Easement’). However, it is not always evident from the title records if such a right exists. An absence of an easement policy covers any costs incurred if a neighbour attempts to obstruct your access.
#4. Adverse possession cover
Assume the property you want to buy includes a huge garden. The vendor claims ownership of this land but lacks the requisite evidence to convince the Land Registry that they are the genuine owners. To claim title under the ‘adverse possession’ regulations, they must have occupied the land for at least the last 12 years. However, for another 12 years, someone else may be able to take the land if they can demonstrate a better claim of ownership.
If such a claim is brought against you, an indemnity policy will cover the costs of fighting it.
#5. Restrictive covenant cover
A ‘restrictive covenant’ is a private agreement between property owners in which one agrees not to do something in order to benefit another. For example, agreeing not to extend the property or not to convert a single residence into individual apartments are two instances.
If a previous covenant has been infringed, and the breach is less than 20 years old, the beneficiary property owner may attempt to enforce the covenant. Indemnity insurance covers the cost of defending against such a lawsuit.
#6. Flying freehold cover
A ‘flying freehold’ property is one in which a portion of your property extends over or below a neighbouring property, such as a balcony that protrudes over your neighbour’s flat. Its upkeep may include periodic access to your neighbour’s land, or you may be reliant on your neighbour for structural support.
Because it’s not often evident from the title documents if you have the right of access, as well as the other rights required to keep this area of your property in good condition, a flying freehold indemnity policy can protect you.
#7. Good leasehold title cover
When you buy a leasehold title, the Land Registry should classify it as an absolute leasehold, which means it cannot be contested.
Some leasehold properties, on the other hand, have strong leasehold titles. This indicates that whoever registered the property was able to prove title to the lease but was unable to offer paperwork proving that the landlord (the freeholder) was truly entitled to grant them that lease.
A good leasehold title insurance policy can protect you if someone tries to claim that no legitimate lease was initially provided.
What is the Cost of an Indemnity Policy?
Indemnity insurance premiums are not prohibitively expensive and are set on a sliding scale based on the value of the property rather than the level of risk.
The cost of a building regulation indemnity policy
The cost of an indemnity insurance policy can range from £20 to £500, or even more for a non-standard policy. Insurance for a lack of planning permission and building rules is expected to cost between £200 and £500, while insurance for chancel repairs liability is likely to cost between £50 and £200.
Can I bargain for a better indemnity policy?
Because indemnity insurance is only available through specialised providers, it is unlikely that you will be able to negotiate a lower price or look for a better deal. Furthermore, some solicitors will charge a fee for arranging the protection, so get the entire house indemnity insurance quote to avoid any surprises.
In contrast to most insurance plans, which have an annual fee, indemnity insurance is a one-time payment that covers future owners of the property as well. As a result, most sellers would prefer to pay a premium than have a high-priced sale fall through.
Who Pays for the indemnity policy?
Your circumstances will determine who pays for an indemnity insurance policy, and this is frequently negotiable. During a sale, it is common for the vendor to ‘squeeze’ the buyer into paying the insurance in order to move the deal through.
Because the insurance policy will benefit the buyer as the new owner of the property, some believe that the buyer pays for an indemnity insurance policy and includes it in the total cost of purchasing a house. If the seller is to blame for the property problem, they will feel obligated to pay for the insurance.
How Long does Indemnity Insurance Policy Last?
Because it is related to the property rather than the owners, indemnity insurance can endure indefinitely. Any new owners will be insured as well. This may change if the property’s value rises dramatically. If this occurs, the owner may be required to pay a one-time additional premium to maintain a sufficient amount of coverage.
Another essential aspect of indemnity insurance is that most plans are null and void if the flaw is disclosed to a third party. For example, if you are covered for a lack of planning permission and then apply for retrospective planning approval for the same building work, you will almost certainly have invalidated your policy and will no longer be protected from a subsequent legal challenge.
Who should I contact about indemnity insurance?
Consult with your conveyancer/solicitor. They can advise you on whether this sort of policy will provide you with the necessary protection to proceed with your house transfer.
It is common for your conveyancing solicitor to contact you regarding an issue that has arisen as a result of the building survey or because the seller has been unable to supply specific documents or certificates.
Is it possible to transfer an existing policy to a new owner?
Yes. Although you purchased indemnity insurance, it is tied to the property. This implies that you can transfer it to new owners who will still be under its protection.
However, if the property value rises, you may be required to pay an additional premium to expand the coverage. There is no charge for transferring the benefit of insurance to the new owner.
Is it always worthwhile to purchase indemnity insurance?
If your conveyancing solicitor recommends indemnity insurance, make sure you understand what it is for. Consider conducting your own study.
In a recent case, a HomeOwners Alliance online user was urged to purchase an expensive indemnity policy. It was to make up for the fact that their porch lacked planning approval and building certificates. A little internet investigation found that the porch was erected in the 1970s. This means that it was completed before construction laws became a legal obligation. There was also an indication that planning authorization had been given.
Indemnity insurance is used as a last option to safeguard against an issue that cannot be easily repaired. So, before you put your hand in your pocket, make sure there isn’t a free way to address the problem.
Rather than opting for the ‘Elastoplast’ alternative of indemnity insurance, it is always preferable to rectify the underlying legal flaw.
If you do require an indemnity policy, ensure that your solicitor arranges it with an ‘A-rated insurer.
Indemnity Policy FAQs
Who should pay for an indemnity policy?
An indemnity policy can be purchased by both the buyer and seller of a property. House sellers frequently obtain an indemnity policy to cover the cost implications of a buyer filing a claim against their property. The insurance is paid for once and lasts indefinitely.
How long do indemnity policies last?
Indemnity insurance is purchased once and never expires. Sellers are not the only ones who need indemnity insurance. Instead of repairing problems with a property, buyers can acquire a policy.
What is an indemnity claim?
Indemnity Claims are the means by which a payer can claim their payment under the Direct Debit Guarantee. If a Direct Debit was taken in error or without authorization, the bank is required to provide an instant return.
