Indemnity insurance is best seen as the insurance that protects you from everything that could go wrong. It does not cover you for just one type of event such as something like landlord boiler cover for instance.
In this article, we will go over some examples of where it is useful, what it may cost you and how to work out if you even need it in the first place.
Why do you need indemnity insurance?
Some examples of why you may need indemnity insurance include:
- There is an expensive legal defect in a property
- The seller doesn’t have a building regulation certificate for previous works
- There are restrictive covenants in the property deed
All of these examples increase the risk that there will be a legal case on the property which is why you will need to take out insurance so you won’t have to pay for legal costs yourself.
If you don’t take out indemnity insurance and you run into a legal situation, you may lose all the potential profit on a property if you are buying the property for an investment.
If you are worried about this, perhaps property is not for you and you’d want to look into alternative investments.
Indemnity insurance is a good idea in general because if there are clear risks associated with a property and you are looking to sell it, it is often cheaper to take out an insurance policy rather than repair the property’s defects.
Who pays for indemnity insurance, the buyer or seller?
In property and under the laws in the UK, no particular party or person is required to provide indemnity insurance. It is just the case that the cost will be looked at by either the buyer or the seller.
However, in most cases, it makes more sense for a seller of a property to take out the insurance as they need to be able to demonstrate to potential sellers that the property comes with a limited amount of risk, making it more appealing to buyers.
This is not mandatory though and a seller can ask a buyer to take out the insurance themself as part of the property deal and part of their agreement.
Nonetheless, in most cases, a seller will cover the cost of the insurance, especially if it is the seller’s fault for there being additional risk in the property like if they don’t have building regulations for a renovation.
This is usually following the advice of a solicitor who will be able to visit the property and work out if there is any form of risk involved that will be taken on by the buyer. They will need to visit the property and conduct a fair assessment.
How much is an indemnity policy?
Indemnity insurance in the UK will usually cost around £200 on average, but like all types of insurance like home insurance, this greatly depends on the size of the property and the amount of risk and costs involved.
Check out Aviva here to compare quotes and further understand what you will be charged on average to take out insurance for your home.
Do you pay for indemnity insurance every year?
Most of the time, indemnity insurance is paid once: when the property changes hands and contracts are signed. This means it is usually just seen as an additional conveyancing fee for buying a house and it is usually very affordable.
Are there alternatives to indemnity insurance when buying a house?
There are no clear alternatives to indemnity insurance but you can take out insurance when buying a house that is specific to a part of a property to reduce the overall cost of insurance. This works well if you know there is risk of a legal case on certain aspects of a build.
Planning permission indemnity insurance
First of all, there is planning permission indemnity insurance. Whenever a house is seen to have renovations or changes done to it, there needs to be planning permission done.
If the planning permission was not processed by a local authority or there is not the right type of planning permission for the extent of the work carried out, you can take out indemnity insurance that covers the event that there is an issue that relates to this situation.
Boiler indemnity insurance
Boiler installation certificates are necessary in a house and there also has to be the relevant gas safety certificates that go with the boiler too. Boiler indemnity insurance will cover a legal issue as a result of not having these documents.
However, the insurance will not cover the cost of repair or replacement for the boiler so it is essential you check over this and understand what cover you are taking out before you buy.
Window indemnity insurance
There have been regulations in place for over 20 years that state all windows have to be Fenestration self-assessment Self Assessment approved (FENSA approved). More about this here. This is a legal requirement for all windows and doors installed in property in the UK.
As a result, it may become hard to know what windows and doors are approved when first buying a house and this is where indemnity insurance comes in.
If the property is old or the seller is unorganised and the documents are missing, this is where indemnity insurance can be useful as it can insure against the costs of legal action.
Having said this, if you have a building that is old and has windows and doors that are clearly outdated, then the indemnity insurance you attempt to take out will be very expensive so this is useful to bear in mind.
How to work out if you need to take out indemnity insurance
Deciding whether to take out indemnity insurance during a property transaction relies heavily on the specifics of the situation and the potential legal issues that may arise.
If your conveyancer, during their due diligence process, uncovers issues that could potentially lead to substantial costs or legal claims against you in the future, they are likely to recommend indemnity insurance.
The reasons you will need to take out indemnity insurance
There are some good reasons to have indemnity insurance taken out and they are listed below. Some reasons could be as simple as you not having enough paperwork. This means you will not be able to interact with a property in the right way
You are being restricted in your property agreement
A common scenario that occurs that requires a homeowner to have indemnity insurance is the presence of restrictive covenants in their property deed. These are rules that limit what you can do with your property and can go back for years.
If you’re buying a property where a previous owner has breached a covenant without repercussion, indemnity insurance could protect you from any future legal claims resulting from this breach.
You don’t have enough paperwork
Another situation that may necessitate indemnity insurance is when there’s insufficient documentation for building or repair works on the property.
If your property has been extended or renovated but lacks the proper planning permissions or building regulation completion certificates, you could be vulnerable to enforcement action by the local authority. In this case, indemnity insurance would protect you from the costs resulting from such enforcement actions.
There are concerns around a property title
A property with a possessory or good leasehold title is another scenario where indemnity insurance could be beneficial. If there’s insufficient documentation to prove the ownership of the property at the time of registration with the Land Registry, or if the land was acquired by squatting, the title may be contested.
Indemnity insurance would cover your legal costs and compensate for the value of the land if a claim arises from a ‘paper owner’ of the property.
You don’t show up in the Land Registry
Properties that are not correctly registered with the Land Registry could also necessitate indemnity insurance.
If for any reason, you as a potential owner don’t show up in the registry, indemnity insurance would protect against legal costs and potential loss of value that might result from claims made against your ownership of the property.
Is it worth it in this case?
While indemnity insurance does come with a cost, the protection it offers against the potential high expenses of legal disputes, and peace of mind it provides, often outweighs the upfront cost.
Consideration should be given to the nature of the defect and whether you will be better off with another type of insurance like building insurance instead that covers structural issues rather than legal ones.
Your indemnity insurance hadn’t been passed on
Sometimes, previous owners may have taken out indemnity insurance but failed to pass it on during the sale. If such a situation arises, it’s essential to consult with your conveyancer about obtaining a new indemnity insurance policy.
This is important because most indemnity policies are set to last in perpetuity and transfer from one owner to another. However, without the appropriate documentation or knowledge of the existing policy, you may be left exposed to potential legal risks.
If there is a legal issue in a property, oftentimes, you will have to take out indemnity insurance and this is usually for the benefit of both the seller and the buyer in the long run.
It is unlikely a seller will be able to sell a property with legal issues if they don’t have indemnity insurance for the buyer or are at least covering the cost of the insurance for them.
Also, from the buyer’s point of view, there is a benefit because they won’t have to cover any legal costs. This highlights the importance of having the right solicitor and conveyancer to visit a property and advise on what indemnity insurance is needed.
If you don’t do this step, you may end up buying a property with issues that you aren’t aware of legally and having to cover legal costs yourself, costing you a lot of money.