Title indemnity insurance

Indemnity insurance – sometimes called legal indemnity insurance – can rescue your house purchase when the conveyancing process throws up a surprise that would otherwise stop the transaction going ahead.

What’s indemnity insurance?

Indemnity insurance is used during conveyancing transactions to cover a legal defect with the property that can’t be resolved swiftly, or at all.

An indemnity insurance policy can be taken out as an alternative to fixing the defect. Particularly when you’re otherwise satisfied with the property you’re buying and simply want to make sure your mortgage is released.

Legal indemnity insurance covers the buyer and the mortgage lender in the event of any loss of value on the property as a result of the defect. The indemnity policy doesn’t actually remedy the defect - it just provides financial compensation in the event of the defect causing a loss.

The issues covered by indemnity insurance usually have a very low risk of causing any actual loss. But if they did cause a loss, it would be significant.

Do I need indemnity insurance?

If you’re trying to buy a house and problems with the title or past building work crop up during conveyancing, indemnity insurance can sometimes help the sale go through.

It’s often used to insure against problems that will cause the mortgage lender to refuse to release funds, despite seeming like insignificant issues to both the buyer and the seller.

You won’t take out the policy – it’s taken out by the seller on your behalf.

How much does indemnity insurance cost?

Most policies cost in the region of a few hundred pounds. It’s a one-off payment. There’s no annual premium to keep paying.

Sellers usually pay for the policy to salvage the sale. But if the seller refuses to pay, you’ll have to negotiate over who covers the cost. Or walk away from the sale.

Can policies be passed on when a house is sold?

Yes, because indemnity insurance is tied to the property not to the owner.

The policy is bought once and lasts decades. It’s handed on to the new owner when you sell the property.

What does indemnity insurance cover?

Defects might include:

• Planning permission/building regulations
• Restrictive covenants
• Absence of easement
• Chancel repair
• Insolvency act

Planning permission and building regulation issues

These are the most common defects covered by legal indemnity insurance.

If the property you’re buying has been built, altered or extended without meeting building regulations or planning permission approval, the local authority could take action to ask for it to be reversed or remedied.

There's a four-year limit on enforcement. So if the work’s older, the risk of any action is small.

In these cases, indemnity insurance is more appropriate than the seller trying to retrospectively satisfy planning conditions for a loft conversion or extension.

Indemnity insurance is no guarantee of the quality of the work. Consider surveys and engineer reports to check it’s safe.

Restrictive covenants

Restrictive covenants are provisions written in the deeds of a property that limit its use in some way – for example not to erect outbuildings.

If you’re buying a house where a covenant has already been broken a neighbour could, in theory, insist that it’s obeyed.

If the breach has been in existence for some time, indemnity insurance can allow a house sale to go through.

There may be conditions to the insurance, such as no current disputes ongoing, or the breach being committed a certain time ago.

Absence of easement

This is where the property is accessed by land where there’s no right to get to it that way.

Indemnity insurance for an absence of easement will cover the cost of establishing easement, or the loss of value if access ever becomes an issue.

Chancel repair

Chancel repair makes the owner liable for repair costs to their local church and there are horror stories of this running to thousands of pounds – but it’s rarely enforced in practice.

Insolvency act

Sometimes, where a gifted deposit is required, a conveyancer will ask for indemnity insurance.

This is to provide cover in case the person making the gift declares bankruptcy.

Invalidating indemnity insurance

All indemnity policies contain a clause that the insurance will be invalidated if the existence of the problem is revealed to third parties.

In practice, this usually makes it impossible to remedy the reason for taking the insurance without invalidating it.

For example, if you had indemnity insurance for an extension built without planning permission and then sought to obtain retrospective planning permission you would invalidate the insurance. Even if planning permission was denied.

This means that it’s a good idea to discuss your plans for the property with your conveyancer.

If, in the above case, you planned to carry out work to the property in future, you could invalidate the indemnity policy by inviting the planning department to inspect the new work.

This means it may not be the right solution. You might be better off asking the seller to complete the time-consuming process of obtaining planning permission retrospectively. Or simply walking away from the purchase.