If a title defect is discovered during your sale, purchase or remortgage an indemnity insurance policy will often be obtained. This is standard conveyancing practice for ease and speed. The indemnity insurance policy benefits all future owners as long as you do not invalidate the terms and conditions. It involves a one-off premium payment and provides cover for approximately 25 years. Cover passes to the next owner and there is usually an escalation clause so that cover increases as property value increases.
Your Conveyancer will obtain the draft policy from an indemnity insurance provider (there are many) and they will ask you to review it. This is important as the policy is easily invalidated and you need to read the terms and conditions. It is also vital that you obtain the insurance from a reputable provider, make sure you are not under-insuring and that it contains an escalation clause. Standard Indemnity insurance policies can be obtained very quickly.
SELLING
As the seller you will need to confirm the policy assumptions (also called the statements of fact). The assumptions must be true and correct as otherwise the policy is immediately invalidated. The buyer’s solicitor and lender require the indemnity in place for protection because of the defect identified. They need to ensure it is valid.
STANDARD / BESPOKE INDEMNITY
The Indemnity Insurance Policy may be to cover a missing planning permission and/or Building Regulations Consent for alterations at the property. Or the indemnity insurance may be regarding a missing Build Over Sewer Agreement or Right of Way. There are many standard Indemnity insurance policies. These are the most reasonably priced.
There are also bespoke policies for certain circumstances. Sadly, there are some defects you cannot indemnify. Bespoke indemnity insurance policies are much more expensive and an underwriter needs to get involved. These take longer to arrange.
BUYING
As the buyer you take the benefit of the policy and it is vital that the policy is not invalidated so you should read the terms and conditions and not do anything that breaches these. In particular note the policy definitions, terms, limit of indemnity and how to make a claim. Generally you are required not to disclose the existence of the Indemnity insurance policy to third parties and if you carry out building works or alterations you will invalidate the policy.
ESCALATION CLAUSE
A good Indemnity insurance policy will also contain an escalation clause so that as the value of the property increases so does the cover. If it does not then on sale you are going to need to pay a top-up premium to increase cover in line with the present property value or purchase price.
HISTORIC INDEMNITY INSURANCE
If the seller already holds a pre-existing indemnity insurance policy it should be checked to confirm it remains valid, there are no endorsements and it covers the current purchase price. If it does not, it will not be fit for purpose. A new indemnity insurance policy will be required. The seller usually funds these as they have the responsibility to resolve the title defect.
REMORTGAGING
For speed it is common that ‘No Search’ Indemnity insurance be obtained with remortgages. However, this must be agreed by the mortgage lender and not all will accept this. Indemnity insurance is much quicker than waiting for searches to come back but it is advisable to wait for the searches to ensure that no onerous or adverse entries are revealed. These could be issues that directly affect property value. That would be an issue for both the lender and homeowner.
AUCTIONS
It may not be possible to obtain Indemnity insurance for no searches or a title defect where you buy at auction. One of the policy conditions may be that this is not an auction purchase. If it is then the indemnity insurance policy is invalidated.
BEWARE
Indemnity insurance does not solve the problem.
It insures you under set circumstances but it is not a cure all. Like any insurance policy it has terms and conditions. If you make a claim there is no guarantee of success.
Your Conveyancer can give no warranty as to the validity or effectiveness of the policy, or the success of any claim. You can easily invalidate an indemnity insurance policy so read it carefully.
The existence of these policies must not be disclosed to anyone, other than a bona fide purchaser or your mortgage lender, without the written consent of the Insurer. You should not make any admission of liability, offer any promise of payment or incur any costs or expenses without the consent of the insurer as you will invalidate the policy. This is not anexhaustive list. There are many other terms. Read the policy in full.
The initial one-off premium is based upon the current market value of your property. As time passes, often the market value increases, and when you are selling or remortgaging, additional payments may be required to ‘top up’ the policy to increase the limit of indemnity. It is impossible to foresee the cost of any future top up payments required.
The success of any claim is not guaranteed. Insurers will only pay out under certain circumstances.
NB: This is generic Indemnity insurance policy advice. I am not able to comment on your specific circumstances and I have no personal knowledge of your matter.
See also my other articles:
• Glossary Conveyancing terms
• Buyer Beware (Caveat Emptor)
• Searches and Survey
• How to Buy at Auction
• Build Over Sewer Agreements
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