Over recent years there has been an increase in the number of indemnity policies being put into place in conveyancing transactions. Yet, there are few claims on these policies.
So what is an indemnity policy? And why would you need to pay for one when selling your house?
| What is an indemnity policy?
An indemnity policy can be purchased from specialist legal insurers to cover various types of risks or property defects. It protects the purchaser from a reduction in value as a result of the potential issue.
The purchaser’s solicitor will examine the documents, deeds and carry out searches on your property; they may also raise enquiries and ask for further information to be provided. The purchaser’s solicitor will want to be satisfied that there are no discrepancies in the deeds, risks or faults with the searches. This is particularly so if the purchaser is obtaining a mortgage on the property.
If there is a risk against which the solicitor believes the purchaser should be protected, one way of minimising the risk is to obtain an indemnity policy. It can be a cheaper and quicker alternative to investigating the risk further.
In most cases, it will be you, as the seller of the property, who pays the insurance premium. This is on the basis that you are selling a property that potentially has various issues. However, in some cases, the parties will split the premium between them.
| What risks does a policy cover?
Indemnity policies can be entered into to cover most types of potential risks.
One of the most common types of indemnity policy is one for lack of building regulations and planning permission. This would be used where you or previous owners have carried out minor works at the property which normally require building regulation approval or, in external alterations, planning permission. The solicitor will usually advise the purchaser and the lender to insure against any enforcement action the council may take should the relevant permissions not have been granted.
Another common risk is for breach of restrictive covenant. Restrictive covenants are promises that run with the land. There may be either a clear breach of a restrictive covenant contained within a deed (e.g. building an extension without approval of another land owner) or there may be a missing document which contains restrictive covenants which are not known to the potential purchaser. The risk of a claim as a result of this breach or potential breach can be insured against.
| Why should I pay for it?
Normally, an indemnity policy will allow the sale to go through quickly and at little expense compared to the cost of investigating the risk or defect further. However, in many cases you may feel that a particular policy may not be strictly necessary. Whether a purchaser requires one will depend upon the advice he receives from his solicitor.
With building regulation and planning policies, whether a purchaser requires the policy depends on when the work was carried out. In some cases, indemnity policies are obtained for work that was carried out many years ago which is outside the enforcement period of the council. In these cases, it may be argued by a seller that the policy was not required.
With restrictive covenants policies, purchasers’ solicitors’ advice will vary. However, in the case of some extremely old deeds, the risk of somebody enforcing the covenant and the cost if somebody should enforce it is minimal. Many say that indemnity policies in these circumstances are disproportionate. However, a purchaser will understandably wish to cover themselves for any eventuality. Your solicitor will advise you whether a purchaser’s request that you pay for an indemnity policy is appropriate.