In simple terms, an indemnity policy is an insurance policy to cover a defect relating to a property. Such policies are commonly used to cover against the cost implications of a third party making a claim against the defects. They tend to be requested by a solicitor acting on the purchase of property when a potential risk has been revealed, particularly where the buyer requires a mortgage.
An indemnity policy is a one-off premium which covers the property and is therefore transferrable between owners. The policy will last for many years – the exact length of this will depend on the insurer.
When a policy is initially put on risk, the limit of indemnity should be equal to or greater than the property purchase price. This will be clearly marked on the policy. If the property is later sold for a higher value, the limit of indemnity may need to be increased with a further premium payable. However, many insurers automatically increase the limit of the indemnity by a specific rate for the first few years of the life of the policy.
When would an indemnity policy be required?
Indemnity policies are used to cover a wide range of risks, with the most common policy tending to relate to a lack of Building Regulations or Planning Permission. This would cover the cost of any works required to be carried out should the Local Authority serve an enforcement requiring the owner to alter or remove any work that does not comply with Planning Permission or Building Regulations.
Other common policies include:
- Restrictive covenant: required when the title of the property contains a restrictive covenant which has been breached
- Missing information: required when important documents containing unknown restrictive covenants or restrictions has been lost
- Absence of easement: required when no legal rights of way, or rights to connect into services, exist
- Absence of build over agreement: required when the Local Authority's consent has not been obtained for building works to be erected over a sewer or pipe
This is not an exhaustive list and many other indemnity policies are available.
What is the benefit of taking out an indemnity policy?
Indemnity policies are a simple alternative to rectifying issues relating to the property. They offer a quick outcome to the potentially expensive and time consuming process of contacting the relevant third party to obtain the desired remedy.
The cost of the policy will be dependent on the purchase price of the property and the risk that the policy is insuring against. The prices of policies can range from around £50 to a £200. However, this is often seen as a small price to pay in order to get a sale agreed.
Points to note
Where an indemnity policy is being sought to cover against approval for works carried out at the property, it should be noted that although the policy will cover against the costs involved in any third party making a potential claim, this does not insure against the quality of the works. Therefore, further inspections or surveys should be carried out to ensure there are no defects.
Indemnity policies work on the basis that no third party has been made aware of the defect or potential risk – so if you are asked to provide an indemnity policy, you must not contact any third party as this will invalidate it.