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What is an Indemnity Policy & why do I need it?

We often get asked the question: What is an Indemnity Policy? If you have bought or sold a house in recent years, you might have been informed by your Solicitor that you need a special type of insurance policy taking out. These are normally referred to as legal contingency or indemnity policies.

What is an Indemnity Policy and what does it cover?

An Indemnity insurance policy covers a property against a particular problem which isn’t usually covered by your more typical house insurance. The problem varies from property to property.

There are now a number of insurers who deal with this type of insurance work. Some specialise in contingency insurance but there are also some other leading insurers who have their own specialist contingency department.

It is extremely rare for a claim to be made under an indemnity policy. As and when a new potential risk is identified in the field of Conveyancing, most insurers are quick to respond by offering insurance. One of the leading legal contingency insurers has recently started advertising an insurance policy to cover the cost of dealing with the eradication of Japanese Knotweed.

Who pays for the Indemnity Insurance?

Along with confusion around what is an Indemnity Policy, we often get asked about who should pay for the Indemnity insurance policy. It is generally accepted that it should be the seller of a property that pays the premium for the indemnity insurance. Premium prices depend on the type of risk of the problem and the value of the property.

The Conveyancing team here at Astle Paterson are always happy to advise clients about whether or not indemnity insurance is appropriate and what the insurance would actually cover.

When would I need indemnity insurance?

Lack of Building Regulations

This is probably the most commonly requested type of indemnity insurance policy. Most types of building and maintenance work to a property are now subject to compliance with current building regulations. This includes work such as having new double glazed windows installed, replacing the gas boiler or having a single storey extension built on the back of the house.

If work has been done without Building Regulation approval then when the property is sold, the buyers’ Conveyancer will normally ask for indemnity insurance. An indemnity insurance for lack of Building Regulations has very limited effect. It does not cover the cost of rectifying any building defects. All it really covers is the cost of being involved in enforcement action that might be taken by the local authority.

In general, however, the local authority can only take enforcement action for breach of Building Regulations for up to 12 months from the date of the breach and therefore it is largely pointless taking out an indemnity insurance policy for lack of Building Regulations if the work was done more than 12 months ago. Unfortunately this does not seem to stop some Conveyancers asking for these policies as a matter of course.

If the property is “Flying freehold”

This arises where part of a property at first floor level or above extends across land which is not owned with the house. A typical example would be where the bedroom of a terraced house extends right across a shared entry. It is now a requirement of mortgage lenders that if there is a flying freehold, an indemnity policy has to be taken out to cover the cost of repairing any damage to the mortgages property which might arise if the adjoining owner allows their own house to fall into disrepair.

If the property is on an “Unadopted road”

If a road is a public highway then everybody has a legal right to use it. There are very few unadopted roads in our local area but if the road is not adopted then it might be necessary to show that the house owners do have a legal right of way over it. If no legal rights of way can be identified in the title deeds for the property, it is sometimes necessary to take out an indemnity insurance policy which would cover the cost of any proceedings or any drop in value if the use of the right of way were to be challenged by the land owner.

Insolvency

If a house owner gives away a property or sells it at an under value and then within 5 years is made bankrupt, the Trustee in Bankruptcy can apply to the Court for an Order setting aside the gift or sale. Any person who subsequently purchased the property within that 5 year period could be seriously prejudiced as could their mortgage lender. An indemnity insurance policy should be taken out to cover these risks.

Restrictive covenants

Title deeds for properties frequently contain covenants which are obligations or restrictions. A common example would be a covenant imposed by a builder not to make any structural alterations to a property without having plans and specifications approved by them. It is very common for breaches of this covenant to take place in subsequent years because the current house owner may have forgotten or might not have even known of the existence of the covenant requiring the approval to be obtained.

Trying to get retrospective approval can be time consuming and is frequently unsuccessful because sometimes the builder will no longer be trading and will not respond to correspondence. The easiest way of dealing with this particular issue is for a restrictive covenant indemnity insurance policy to be taken out which as with other types of policy would cover any costs involved if any person entitled to enforce the covenant took enforcement action.

Many properties now have registered title. When the Land Registry deals with registration, they have to check through all of the title deeds submitted to them and they have to note on the register of title any provisions such as covenants which might affect the property. It is commonly the case that old title deeds have been mislaid and if they are referred to in the deeds that the Land Registry have, they will make what is known as a protective entry in the register making reference to the fact that the property is subject to unknown covenants. Again the usual way of dealing with this is by way of indemnity insurance.

Contaminated land

On most property purchases, the routine searches will include an Environmental Search. This will sometimes indicate that there may be a risk that the land upon which the property is built may have been contaminated in the past by former industrial uses. If a site is identified as being contaminated, the local authority has a duty to carry out whatever work is required to clean up the contamination. They might be able to recover the cost of this from the house owner. It is possible to insure against this risk but generally contaminated land indemnity policies will only be issued for an initial period of 15 years.

Contact us for advice on Indemnity Insurance

If you’re asking the question what is an Indemnity Policy, and would like to contact us for advice on Indemnity Insurance, then you can choose one of the following:

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