When you're in the process of buying or selling a property, you might receive a recommendation from your conveyancer to purchase indemnity insurance.
But, what actually is indemnity insurance? Does this mean something is wrong with the property?
In this article we outline the basics, including: what it covers, how much it might cost, and whether you actually need it.
Indemnity is a type of insurance policy you take out to cover a property against any legal issues it might have.
Most issues covered by indemnity insurance are very unlikely to cause a problem. But, if they do, they could be incredibly costly.
Indemnity insurance will protect you against any costs or loss of value that might arise because of a legal problem with your property. It won't, however, cover the costs necessary to actually fix the problem.
For example, a property might have an indemnity policy because the owner did not get planning permission before building their extension.
The insurance will cover any costs incurred if the local authority should investigate the property. But, it will not cover the cost of getting planning permission retrospectively granted.
Most indemnity policies also have a condition that means if you tell a third party about the problem, you'll invalidate the insurance. So, if your property is missing the correct planning permission, applying for retrospective permission would invalidate your insurance.
Buyers' Tip: If a property is missing any planning permission, building regulation, or installation documentation make sure you have a thorough survey done. Even if the owners have indemnity insurance. This will tell you whether the work was done to a good - and more importantly - safe standard.
Indemnity insurance is generally considered a last resort. It's usually taken out when the issue can't be fixed, or is too expensive or time consuming to complete.
It's likely your conveyancer will recommend taking out indemnity insurance if you're facing one of the following problems:
One of the most common reasons people take out an indemnity insurance policy on a property is because the previous owner made alterations (such as adding an extension) without the proper planning permission in place. The insurance will protect you against the costs of local authority enforcement and fines.
Some properties come with restrictions in their deeds. These can be things like not owning farm animals, or building an outhouse. Usually these restrictions were decided many years ago, and in some cases property owners may have inadvertently broken these rules. If a previous owner has breached a restrictive covenant you can apply for indemnity insurance to cover your legal costs, or any loss of value to your property, in the unlikely event that the local authority decides to enforce the restrictions.
If your boiler has been installed by an accredited professional you should have received an installation certificate. This proves the work was completed to the appropriate legal standard. If you move house, you'll have to provide this certificate to the new buyer, so that they can show their home insurance provider. If you've lost the certificate you can take out indemnity insurance instead.
Like with boiler installations, if you have your windows and doors fitted professionally, you will receive an installation certificate. This is usually called a FENSA certificate. This is important for insurance purposes as it proves that your property has windows and doors that are fitted to the legal standard and are thoroughly secure. If you do not have these certificates, you will need to take out an indemnity policy.
If you live near to a church, you may find that you are expected to contribute towards any repair costs they incur. Chancel repair liability comes from a set of out dated laws that have never been revoked. Many churches no longer use their right to collect repair costs from local homeowners. However, if you take out indemnity insurance, your policy will cover any costs should they ever arise.
If you're only able to access part of your property (for example your drains) by crossing into someone else's land, you'll need a 'Right of Easement'. However, if a Right of Easement hasn't been granted, indemnity insurance will protect against any loss in value that might occur if your access is restricted.
If you are gifted all or most of your deposit for buying a house, you may find that your home becomes tied to your benefactor's personal financial situation. If they declare bankruptcy your home could be seen as an asset for repossession, because of the large financial contribution they made towards its purchase. Indemnity insurance can provide protection from any financial loss you incur in the unlikely event that this happens.
Deeds and Land Registry documentation are a key part of proving your ownership of the property. If you're unable to find your copies, you'll likely be advised to take out indemnity insurance.
Indemnity insurance is tied to a property and not a person, so it lasts indefinitely (as long as the building stands and the policy is not invalidated).
Once an indemnity policy has been taken out on a property it will be passed to each new owner when it is sold.
Usually this means that you'll only have to pay a one off charge for indemnity cover, rather than an ongoing premium, as with other sorts of insurance policies.
The only time you might have to pay more is if the property significantly increases in value. This is because the cost of indemnity insurance is tied to the value of your property. If your house sees a large increase in value you may have to 'top up' your policy with another one-off payment to ensure your property continues to have adequate coverage.
The cost of indemnity policies varies depending upon two things:
The value of the property
What you are looking to cover
You'll typically find that because indemnity insurance is bought with a one-off payment, rather than a recurring premium, it is more expensive than other types of insurance. As a general rule you can expect quotes to be in the hundreds of pounds.
However, it really depends on what issue you need insurance for. It is much cheaper to get indemnity insurance for a chancel repairs liability than for a property without planning permission. You may find you are able to get indemnity insurance for this issue for as little as £20 or £30.
This is because the financial risk to the homeowner (and their mortgage provider) is significantly less. A local authority is less likely to investigate an owner for not paying their chancel repairs liability, than they are for failing to abide by proper building regulations.
There's no set rule about who pays for indemnity insurance. This is because policies are tied to properties rather than individuals.
Generally if the legal issue is the fault of the home seller (such as losing a FENSA certificate, or breaching a restrictive covenant), they will pay for the insurance.
On the other hand, if a home buyer wants indemnity insurance cover because their deposit was a gift they will be responsible for paying for that policy.
However, If the issue is long term, or not anyone's direct fault, you can negotiate who pays for the insurance policy. Either the cost will be split between buyer and seller, or one party will volunteer to pay the cost to ensure that the sale goes ahead.
Indemnity insurance is generally taken out as a last resort. Usually, you'll buy this sort of insurance product if you can't fix the problem, it's too costly to fix, or it'll take too long - putting your home sale or purchase at risk.
If you're in a chain, and the only thing preventing your home sale going through is a missing boiler installation certificate, it's likely that taking out indemnity insurance is worthwhile.
However, if you're looking to purchase a property that had an extension a year ago without the proper planning permission, you might want to consider your options carefully.
When making your decision, take into account the fact that most indemnity insurance policies are invalidated if you tell a third party about the problem. So, if you intend to fix the problem once you move into the property, it may not be worthwhile paying the insurance premium.
On the other hand, in some cases mortgage lenders are only able to approve a loan if adequate protections are in place.
If you're unsure about the best option for you, take the time to talk to your conveyancer or an independent financial advisor. They will be able to provide advice tailored to your personal situation.
Due to the specialist nature of indemnity insurance policies, you're unlikely to find a wide range of brokers on the usual comparison sites. Usually, you'll be recommended an insurer by your conveyancer.
Although it's very likely your conveyancer will recommend a good insurer, make sure to double check that the broker is accredited, and that their quote is in line with what you might expect before you accept.
It takes 2 minutes. 100% free. No obligation.
Copyright © 2021 GetAgent Limited
We are a company registered in England & Wales, company number 09428979.