Buying a property involves a lot of money – and a fair amount of risk. Because so much could go wrong, there exist a range of insurance products designed to help remove as much stress and uncertainty from the process as possible. An indemnity insurance policy can protect you against some of the key issues that can be involved in property purchases.
What is indemnity insurance?
The process of buying property can often turn up a few surprises. Sometimes these are relatively minor, like repairs that need to be made before the sale can continue. But sometimes the issues identified through the conveyancing or survey processes can cause long delays and may highlight potential future issues.
This is where an indemnity insurance policy can help. It offers protection for the buyer against the costs of fixing many of the problems that might be revealed.
For example, your conveyancer may discover that the property seller can’t provide key planning permission documentation relating to an extension they had built. This might cause you problems in the future if a neighbour were to challenge the extension, since it would by then be your responsibility as the new owner. By taking out an indemnity insurance policy when you buy the property, you can cover yourself against any loss of value or legal claims that may someday result from this issue.
What does indemnity insurance cover and how does it work?
Taking out a policy can protect you against a wide variety of potential issues, most of which tend to be relatively small. The idea is that you take out indemnity insurance instead of trying to fix the problem(s), which could end up being more costly if they do become an issue.
Here are some of the main reasons why people take out indemnity insurance.
- Issues with planning permission, such as a lack of documentation showing that the right kinds of permission were obtained before building work started
- Building regulations not being met during building work, or the relevant paperwork being lost. Your policy will cover the cost of any work needed to correct the issue
- Issues relating to a ‘restrictive covenant’ that limits the property owner’s ability to build extensions. Your policy will cover the cost of any claims made against you because of actions by the previous owners
- If you live within the boundaries of a parochial church council, you can use indemnity insurance to cover your contributions to repairing the church (known as ‘Chancel Repair Liability’)
- If you can only access some of your property through your neighbour’s garden (such as your drains), your policy will cover any legal costs that arise if they try to block your access
- Any issues that result from missing deeds or Land Registry documents
- Legal costs from a previous owner not seeking permission from the appropriate water authority before carrying out building work
- Covering the legal costs that arise from someone making a legal claim on your land due to a lack of relevant Land Registry documentation on your part
How much does indemnity insurance cost?
The big difference between indemnity insurance and other policies is that it is a one-off payment. So, although you won’t pay monthly premiums, your single payment could be quite substantial. This will depend on the type of cover you are looking for, the circumstances and risks surrounding the issue in questions, and the provider you choose.
For example, protection against a lack of planning permission could cost you hundreds of pounds, while covering the cost of church repairs could start from as little as £50. Secondly, the insurer will look at the value of your property. The higher the value of your house, the higher the level of protection needed – and so the greater the cost. It’s important to note that because this is a very specific type of insurance, it’s not so easy to shop around like you would for other types of insurance. However, a specialist financial adviser or mortgage broker should be able to help you find the best deals.
Who usually buys indemnity insurance?
Indemnity insurance benefits whoever owns the property, so is usually bought by the buyer. However, the insurance resides with the property, not the owner, so can be passed on to subsequent owners. For this reason, a seller may also choose to buy indemnity insurance to facilitate a sale, since the insurance will cover the new owner too.
Should I take out an indemnity policy?
The question you may face is: do I try to fix the problem now, or take out indemnity insurance? The main motivator for many people is time. Delays in your property purchase can be costly, as you may lose your own buyer or be gazumped if you make the other people in the chain wait too long. Getting cover for the problem is much quicker, and will protect you in the interim even if you decide to fix the issue at a later date.
There are also other specific circumstances in which it is wise to take out indemnity insurance. Firstly, because the insurance also covers mortgage lenders, your solicitor may insist you take out a policy to secure funding for the purchase of the property. Secondly, your conveyancer may advise you to take out a policy before committing to a purchase.
How long does an indemnity insurance policy last?
Indemnity insurance can last indefinitely, since it is tied to the property not the owners. Any new owners will continue to be covered. However, this may change if the property significantly increases in price. If this happens, the owner at the time may need to pay a one-off additional premium to keep an appropriate level of cover.
Another important fact about indemnity insurance is that most policies are invalidated if you reveal the defect to a third party. For example, if you are covered for a lack of planning permission and then subsequently apply for retrospective planning permission for the same building work, it is very likely that you will have invalidated your policy and no longer have any protection against a subsequent legal challenge.
Do I really need an indemnity insurance policy?
The tricky thing about indemnity insurance is that it covers such a broad range of issues, which can make it hard to know if it would add value in your particular situation. The only way to get an idea of this is to consider your circumstances, preferably with the help of expert advice. Both your solicitor and your mortgage broker can be useful here. Your mortgage broker should be able to point you towards the best value indemnity insurance, as well as advising you on the types of mortgages available to you.