indemnity insurance explained – a guide for property buyers

Deciding to buy a new home can be as confusing as it is exciting, with so much to consider before you get your hands on the keys. Whether it's all the forms that you have to fill in, or the literature on the home you're planning to buy that you have to read; maybe it's the state of the property that you're worried about after getting the chartered surveyor's report, or it's understanding all the various caveats and limitations affecting the use of the home that might be bewildering you.

And it really doesn't help when unfamiliar terms are bandied around, particularly if they are often jargon or at least usage that's common to the industry that employs them. One such term is indemnity insurance, which might come up at any point in the homebuying business - and occasionally when you are selling, too.

The dictionary defines indemnity as being security or protection against a loss or other financial burden. Therefore, indemnity insurance means the cover of legal costs and the potential damages against you brought in a lawsuit.

Frightening thought that might sound, from a house-buying or -selling standpoint, it's a straightforward method of protecting yourself against the cost of problems that surface during the purchase or sale of a property.

Specifically, the insurance is available to protect you from the effect of a legal defect found with the property that can't be resolved effectively, or one that incurs significant cost and added time to seek a resolution.

To be clear, this is insurance to cover the cost of the legal process and any litigation arising from a problem and the loss of value to you as a result. It is not a way of paying for remedies, replacement or other solutions to a problem (common targets are boilers, windows, doors, building work and sundry items that will normally have legal paperwork associated with it).

So, for example, if windows have been fitted that don't conform to the latest building regulations, indemnity insurance will only cover the legal costs of establishing the position and the loss of value that any legal action will incur. The insurance will not pay for the correct type of windows to be installed.

There are several different policies which might be suitable for your specific needs. Note that not all of the indemnity insurance policies are necessarily pertinent to your situation (if any of them), and you should consider the level of risk of the identified issue against that peace of mind you'll get if they are relevant.

The most common of these policies are:

Chancel repair 

Going back a few centuries, wealthy landowners used to look after the various properties that were located on their land, including worker's homes and the local church. 

This requirement to pay for the upkeep of the church and even pay the stipend of the priest or vicar presiding over it became muddied over time as sections of the land were sold off for various purposes, such as building further homes and estates. 

But those properties might possibly carry with them that earlier requirement to pay a percentage to the upkeep of the local church. 

Although attempts have been made to sort this problem out so everyone was clear, the problems of who might be liable for chancel repairs now or in the future are still present. To avoid any future financial concerns, your conveyancing solicitor might recommend taking out a relatively cheap policy to cover you for the period of your occupation at the property.

Restrictive covenants

A particular problem for older properties, driven by the history of the area in which the property is built, or perhaps for newer buildings which have covenants placed on them in return for allowing them to be built, restrictive covenants may cause you a problem in the future. 

Provisions for these covenants are detailed in the deeds, and it means restrictions on the full use of the property in some way. For example, there may be a public access path running across the boundaries of the property, or you might be required to maintain what is otherwise a publicly accessible area such as a pathway running alongside the property's boundaries. 

Some of the more bucolic examples include restrictions on what is grown, limitations on keeping certain animals or providing access to water sources (for example, a well or spring) that exists on your land. 

Taking out the insurance not only protects you in any case of the covenant being breached and will also protect you from any fallout from a breach by a previous owner.

Planning permission

If your seller has made any alterations to the property that you are looking to buy, and the conveyancer's searches identify that the requisite planning permissions had not been sought - or in the case where the seller cannot provide the necessary documentation to prove that the changes made to the property were within the permitted development rights that were in place at the time the alterations were made - the planning department of the responsible council are within their rights to order the alterations to be reverted back to the original state or other remedial action to be taken. 

Planning permission indemnity insurance will cover this council enforcement risk.

Building regulations

Connected with the planning permission, and perhaps more worrying, is if the seller can't provide documentation to show that any alterations that have been made conform to the building regulations. 

The indemnity policy that covers the planning permission issues highlighted above will also be suitable for dealing with the legalities of building regulation issues. 

In this case, it's also worth getting a detailed survey completed to verify that the building's structure is safe and indeed that any specified alterations conform to the requisite building regulations that are in force.

Easement issues

The term ‘easement' is used to define any access privileges that come with the property. For example, you might need to cross someone's land to access your property, or perhaps the only way to put out recycling or waste for disposal is to take the bins across someone else's property or land. 

Where this easement has not been allowed or has been changed, the indemnity insurance will cover the cost of the legalities as well as any loss of value that has been inflicted by the change to the easement conditions.

Boiler certification

Every gas boiler should have a certificate covering the installation by a registered gas fitter. Because of its essential nature, if you are the seller and are unable to provide the certification, you might want to take out an indemnity policy to cover issues arising. 

It is always worth getting the boiler checked over by a gas-registered engineer, who will be able to advise you further and issue you with a gas safety certificate if all is well. 

If you are buying the property and there is no certification available, although a survey will not touch the boiler, the surveyor will be able to make an assessment of its age and any visual issues that might arise from it - again it's always worth getting it checked over by a gas-safe engineer. 

If problems are identified with the boiler, be aware that any indemnity insurance policy that you take out will not cover the cost of the assessment, repair or replacement of the boiler.

Windows and doors certification

If the windows and/or doors were fitted after 2002, it is a legal requirement for the fitters to provide the homeowner with FENSA (Fenestration Self-Assessment Scheme) certificates, which confirms that they have been fitted to satisfy the provisions of the building regulations that are in force at the time of installation. 

Indemnity insurance will cover the legal aspects of any enforcement action that is taken by the local council in the event that the FENSA certificates cannot be supplied. As with boilers, the insurance policy will not cover any remedial work or replacement costs to bring any substandard work up to the requirements of the regulations.

Insolvency and bankruptcy

Buying a home is becoming increasingly costly and that's just the basic price of the property, which might mean you decide to ask a friend or relative to help you out with supplying some or all of a deposit. 

However, in the event that they are declared bankrupt, you might find that your creditors will now have a call on your property. Taking out suitable indemnity insurance will cover you for any potential losses in value should this situation arise.

Absent freeholder

If you are planning on selling a leasehold property, or thinking of buying the freehold or extending the lease, but the freeholder is absent or uncontactable for an extended period of time, you might want to consider taking out an Absentee Landlord indemnity policy, which will cover you for the risk and costs of the absentee landlord returning and making claims on any specific obligations in the terms of the lease. 

As a buyer, the mortgage lender may require you to take out the indemnity insurance policy to cover you should there be an absentee freeholder in order to cover the risk of them lending the money to you in such cases.

Adverse possession

Where the seller of a property lays claim to ownership of land but cannot provide the evidence to HM Land Registry that they are the rightful owners and, assuming there are no others laying claim to some or all of that land, they will only have what is known as a “possessory title”. 

If the land is part of the sale, the buyer will need to consider taking out a suitable indemnity policy to cover any financial losses and legal claims made by someone else on that same piece of land.

Unknown easements, rights and covenants

In some instances, the current use of land or access to it might be in conflict with any covenants and restrictions that might be in a legal document. 

Or there might be other documentation which, if enforced, might change the use of the property and its land. For this purpose, it might be advisable to take out an indemnity insurance policy to cover costs and any loss of value as a consequence.

It is unusual for a home buyer or seller to ask for an indemnity insurance policy, since it is usually driven from a suggestion or recommendation made by the conveyancing solicitor looking after your transaction. 

This is because they will be focused on all the legal aspects of the transaction, which is where the vast majority of the problems that trigger the discussion about the need for indemnity insurance might arise.

Even if there is something found with the property within the survey - for example, concerns about any of the alterations that have been made and whether they conform to building regulations, issues with the fitment of doors and windows or the installation of a boiler, and even questions arising from access and easement to and from the property - these items will be highlighted in the survey report as points for the attention of your solicitor.

When it comes to considering the value of taking out an insurance policy, it's worth doing the research to find out what policy is best for your needs and what the benefits provided to you are should the policy need to be activated.

It's also important to consider the cost of the policy against the level of risk that you might be running without it. If you are at all unsure about what the insurance policy is designed to indemnify or why you might need it, then you should talk to your conveyancing solicitor who will guide and advise you on the best course of action to take. They will have the experience of these matters and be able to provide their insight into the importance or otherwise of each type of indemnity insurance policy.

The indemnity insurance will cover you and your successors, which means it becomes an important document to pass on when selling the property. If you are taking out a mortgage to buy the property, the indemnity insurance will cover the mortgage lender, too. In fact, when your conveyancer advises you to take out any kind of indemnity insurance, it's worth letting your lender know so that they are aware and can have the assurance that their investment is covered.

Your conveyancing solicitor will be able to provide more details on the cost of the suggested policy, which will be different dependent on the type of indemnity to be covered and the extent of the issue that it covers. But, broadly, the cost of indemnity insurance can be as little as £20-£30 or up to a few hundred pounds.

Your solicitor will usually handle the establishment of the policy since they understand the details of the problem that requires the insurance. Once set up, the conveyancer will add this as a third-party cost to your conveyancing bill. The cost will be itemised as such so that you are completely clear on what you are being charged and why.

If you are buying or selling a property and are unsure whether you are covered for any legal costs of potential problems and whether indemnity insurance is right for you, you should talk to your conveyancing solicitor.

The experts at Homeward Legal are well-versed in all aspects of the conveyancing process, including indemnity and the policies that are available, providing a quality conveyancing service at a fee that is great value for money!

Call  to get your conveyancing quote started, or to discuss your concerns with your plans to purchase or sell your next home.