What Is Indemnity Insurance?

Image of two model houses in the grass. New house and old house.

When a property is sold, the buyer’s solicitor will check the legal pack provided by the seller’s solicitor. Sometimes there are missing pieces of information or defects which the buyer and/or their lender will require to be rectified before being able to proceed to completion.

Indemnity insurance is generally used to plug the gaps where it would be disproportionately time consuming or expensive to solve the core issue. It is usually seen as a quick fix that allows transactions to proceed to completion quicker.

There are now many different types of indemnity insurance to cover an array of risks. The most common insurance is for lack of planning permission or building regulations approval for work that has already been carried out. Another common risk is work carried out in breach of covenant. It is even necessary sometimes to obtain insurance to cover the risk of a seller becoming insolvent after the sale has completed, if the property was sold for less than its true market value.

How Much is Indemnity Insurance?

The cost of indemnity insurance can vary from between £20 to several hundred pounds. The policy is usually paid for by way of a one-off premium, paid on completion. Whether the seller or buyer pays for the policy is usually the subject of debate. The seller will argue that the buyer should pay because they will have the benefit of the policy in the future. The buyer will argue that the seller should pay because the property they are selling contains a defect. Some parties choose to split the cost to help smooth the transaction along.

What is Indemnity Insurance Cover?

It is important to remember that indemnity insurance does not cover the cost to repair or replace something. For example, if indemnity insurance is taken out because an extension was carried out without building regulations approval, the insurance will not cover the buyer if there is a defect in the structure of the extension, it will only cover the risk of enforcement action taken by the local authority for breach of building regulations.

Generally, once an indemnity insurance policy is placed on risk, it must not be disclosed to certain third parties. For example, if insurance was taken out to cover a breach of covenant, the existence of the policy must not be disclosed to the party entitled to enforce the covenant. The policy should be kept safe until a claim needs to be made. The insurance policy usually continues in perpetuity and can be passed on to future buyers when the property is sold.

Indemnity insurance policies are very common in today’s conveyancing process but it is up to the conveyancer to use their expertise to determine whether or not insurance is actually required. Ideally, the underlying defect should be resolved rather than using the quick fix of indemnity insurance.

If insurance is required, however, your conveyancer should discuss with you the choice of insurance providers with you and ensure that all the assumptions and limitations are explained to you in full.

If you have any questions regarding indemnity insurance or the conveyancing process in general feel free to give me a call on 01283 214231.

 

Katie Holmes
November 2019

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