Residential Conveyancing - will indemnity insurance provide a cure or a headache?

Buying a property - will indemnity insurance provide a cure or a headache?

Why have indemnity insurance?

In recent years, indemnity insurance has become a common feature of the residential conveyancing process.  Indemnity policies have become a popular way of enabling a transaction to proceed in the face of defects in the title, perceived breaches of historic restrictive covenants affecting a property or alterations having been carried out without planning permission and/or building regulation approval. But is it an acceptable resolution?

It is one that is accepted by most lenders, though the onus is on the conveyancing solicitors to ensure that such a policy is appropriate and adequate. It is also a quick and relatively cost-effective solution to the problem as the premium is a one-off payment and it can often benefit the insured, its lender and successors in title.

The Pitfalls

Although the home owner and their lender, may be relying on the security of such an insurance policy the following factors that may result in the policy being inadequate and even void:

1. It is essential that all the necessary facts of the case been revealed to the insurance company and that the assumptions on which the offer of insurance has been made are accurate. If the seller takes out the policy, how can the buyer be sure that all the facts have been revealed but if the buyer takes out the policy, does he know all the facts? It is important to check that the right questions been asked of the sellers and that they have they been fully answered.
2. Are the risks covered relevant and sufficient for the purpose for which it has been taken out? Although there are ‘off the shelf’ policies, the assumptions made and risks covered by these policies do not always fit the facts of the case and bespoke policies can be more expensive.
3. It is necessary to look carefully at the conditions of the policy. Can they be met and when the time comes to claim, have they been met? Even if the policy is adequate, most policies have a non-disclosure requirement and will be void if the existence of the policy is revealed to a potential claimant.
4. The indemnity limit on such policies is usually based on the current market value of the house. Whilst most include an escalator clause, property prices can rise in excess of this so a home owner may find that the level of cover when he comes to sell is insufficient and any new purchaser and lender could require that the level of the policy be increased. This would involve further premium payments or even payment for a new policy.

Equally, should the worst happen and a claim has to be made on the policy, the insurance company may decide to defend the claim and that could embroil the property in lengthy litigation, making it difficult to sell until matters are resolved.

Limitations

Something to make very clear is that these policies do not correct defects and will only offer cover on depreciation in market value. In the case of an absence of building regulations consent, a policy will provide cover for the cost of enforcement action but it will not cover any loss that may arise due to a defect in the works. Whilst building regulation approval does not guarantee the works, its existence gives some comfort that works were adequately executed, so applying for retrospective consent may be a preferable way forward.

However, the issue here is that it may delay the purchase. Any building inspector will be bound by current regulations which may not have been in force in the past and they can also require surface finishes to be removed during their inspection. In the worst-case scenario, they could require the complete removal of the works. Additionally, applications for retrospective consent preclude the insurance route in the future. These possibilities are certainly a deterrent against applying for retrospective consent but insurance is not a ‘cure’, it merely deflects some of the risk and any future purchaser or lender may decide not to accept it.

Sticking Plaster or Cure?

Indemnity insurance policies can ensure that the sales of properties affected by these issues run more smoothly and quickly and it passes some of the risk for the purchaser to the insurance company. However, purchasers should be aware that standard policies may not always be appropriate and more expensive, bespoke policies may be required. Additionally, policies may not be acceptable to future buyers or lenders, either due to a change in lending criteria or the state of the market. Most importantly, they do not cure the problems – they are essentially ‘sticking plasters’ that allow the smoother running of the conveyancing process.

If you would like assistance with a property transaction where you have encountered any of the above problems please email Karen Trott at kt@cbglaw.co.uk or call 020 7462 6024.