If you are buying or selling a house, you’ve probably heard of indemnity insurance – it is becoming an increasing feature of housing transactions. But before you hand over hundreds of pounds for policies, find out what it is and if you really need it.
What is indemnity insurance?
Indemnity insurance is a type of protection purchased during housing transactions. It is a one-off payment for a policy that then lasts forever.
It is used to offer protection if there is a potential problem with the property that could result in local council action or legal problems in the future.
“Legal indemnity insurance is obtained in order to offer protection to a buyer (and a lender) where there is a defect in the title, which cannot be resolved,” says Sarah Ryan, head of conveyancing at Co-op. “Legal indemnity insurance does not remedy the insured defect, but merely offers financial compensation should a claim be brought in the future.”
Typical reasons for taking out indemnity insurance include to cover missing building regulation certificates, planning permission issues or missing professional installation certificates for fires or windows.
Indemnity insurance is often associated with older properties, where historic rights are still on the deeds.
“The right of Mrs Miggins to draw water from a well may have been essential back in 1860,but it might be a bit inconvenient if her heirs and successors could still wander into your garden with a bucket today,” says Henry Pryor, a property buying agent. In this example, you would purchase an indemnity policy to protect yourself from future claims from the Miggins family to access water on your land.
How much do policies cost?
The price of an indemnity policy can vary hugely depending on what it is protecting you against. The one-off cost of a policy to make up for a lack of FENSA certificates for new windows could be as little as £20, but policies covering missing building work certificates can cost several hundreds.
Unfortunately, you can’t quibble about the price, or search for a better offer on a comparison website; indemnity insurance is only offered via specialist providers, so your solicitor will find out the cost for you.
Can policies be passed on when a house is sold?
Unlike most insurance policies, indemnity insurance is tied to the property, not to the owner, so a policy should only need to be purchased once and then it can be simply handed on to the new owner when you sell the property.
The only issue might be if you need to increase the cover to reflect an increase in the value of the property.
Who should pay for the policy?
This can be a real bone of contention in a house sale. Buyers often feel the vendor should cover the cost as they cannot provide the necessary paperwork. But sellers feel as the policy will benefit the buyer it is up to the buyer to pay for it.
“It is usual practice for a seller to pay the premium. However, this can be negotiated,” says Ms Ryan. “If the seller does pay, then the buyer will be responsible for any increased premium should they sell in the future.”
Is indemnity insurance always needed?
No. If your solicitor suggests buying an indemnity policy, think twice before agreeing. In the middle of a housing transaction a couple of hundred pounds can feel like nothing when the rest of the time you are dealing in tens of thousands, but you may find you’ve handed over money for nothing.
I recently sold a property where my solicitor, after a lengthy email conversation with the buyer’s solicitor, advised me to pay £200 for a policy to cover a lack of certificates for building regulations and planning permission.
It was only when I demanded more information that it came to light that the planning permission was for an extension built in the 1970s, well before any legal requirement for building regulations and long after the limit for local council enforcement on lack of planning permission. Plus, a bit of digging revealed that planning permission had been granted.
What should I do if my solicitor advises me topurchase a policy?
“I act for both sellers and buyers and often come across situations in which my clients are asked to pay for indemnity insurance to address a defect with either a sale or purchase of a home,” says David Pett, director of MJP Conveyancing. “In the majority of these cases, there is no justification for incurring the cost of establishing this insurance cover.”
Mr Pett advises to always look into whether an alternative free solution is possible. “A good example is where a valid FENSA certificate for the installation of a door or window exists, but cannot be produced to the buyer. There are a number of conveyancers who will advise their client to insist on indemnity insurance even though the existence of the FENSA is evidenced in the result of a local authority search.
“My advice to homebuyers when indemnity insurance is recommended is to challenge the need and ask whether there is an alternative fix.”
Why are indemnity policies more common now?
“Time was when one could take a view on the fact that the seller (and consequently the buyer) doesn’t appear to own the physical land that the driveway to the property runs across. When the house cost 500 guineas, it perhaps wasn’t quite so important, but if you are spending a million pounds you would like to know that you don’t need a helicopter to access your new home,” says Mr Pryor. “An indemnity policy usually costs less than a thousand pounds and allows you to sleep at night.”
But it isn’t just the rising cost of property that has meant buyers are more determined to avoid future problems.
Another reason for the rise in indemnity policies is the speed of housing transactions. In a hot property market, that period between your offer being accepted and contracts being exchanged is nerve-wracking for buyers and sellers. As a result, it is quicker to fork out for an indemnity policy than wait for missing certifi cates to be found or planning queries resolved.
“In theory, indemnity insurance should only be used as a last resort. However, in practice it often provides a quick and low-cost alternative to the work required to correct a defect,” says Mr Ryan.