What is indemnity insurance?
When you are buying or selling a property your conveyancing solicitor might suggest taking out indemnity insurance. But what is indemnity insurance, does it represent value for money, and - before you spend hundreds of pounds - do you really need it?
What is indemnity insurance?
Indemnity insurance is a protection policy sometimes purchased during housing transactions. For a one-off payment you get a policy that covers the cost implications of a third party making a claim against any defects with the property you are about to buy.
In other words, an indemnity insurance policy protects you from a specific potential problem with a property that could cost you in the future. For example, if you are buying a property and the seller can’t provide a building regulation certificate then your conveyancing solicitor might suggest taking out an indemnity policy to cover potential costs. This will then cover any costs in the future if your local authority pursues a claim because you don’t have the certificate.
However, it is important to note that indemnity insurance will not over the cost to repair or replace something. For example, if there was a policy in place because you didn’t have the installation certificate for a boiler it wouldn’t cover repair or replacement of the boiler. For this reason, it is always important when you are buying to have the property surveyed and installations checked by a competent contractor.
What does indemnity insurance cover?
An indemnity insurance policy covers a legal defect with the property that either can’t be resolved or would be very costly and/or time consuming to do so.
So, instead of trying to fix the problem you simply take out indemnity insurance to protect you against an expensive bill in the future.
Most things covered by indemnity insurance are very low risk but would be costly if they did occur.
Who do I speak to about indemnity insurance?
Speak to your conveyancer/solicitor. They can advise on whether this type of policy can offer you the protection you need in order to proceed with your house move.
Often it will be your conveyancing solicitor contacting you about an issue which has either come to light as a result of the building survey or because the seller has been unable to provide certain paperwork or certificates.
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Common indemnity policies
Restrictive covenant indemnity insurance
Some older properties come with provisions within the deeds that limit the use of the property in some way. These are known as restrictive covenants. It could be that you can’t keep livestock, or you have to give your neighbours access to a well.
If previous owners have already breached the covenant you can still take out indemnity insurance. It will protect you if the breach causes problems in the future. Find out more with: Restrictive Covenants – What they mean for you.
Planning permission indemnity insurance
When a previous owner has made alterations to the property without planning permission you could take out an indemnity policy. This would cover the risk of local authority enforcement. This kind of indemnity could also help if there are missing building regulation certificates.
Find out more with our guide to selling without building regulations.
In this scenario where building regulation certificates are missing, we would also recommend buyers get a survey. Tell the surveyor about the issue and get them to make sure the building work is structurally safe.
Indemnity insurance for a boiler
If you are selling a home and can’t provide an installation certificate for your boiler you could get an indemnity policy to cover it. However, you may want to consider getting a gas safety certificate first – this will give more practical reassurance to your buyer about the safety of the boiler and avoids you having to pay out for indemnity insurance.
Equally, if you are buying it is important to ensure the boiler is safe. Don’t just accept an indemnity policy instead. Indemnity insurance will not cover the cost of repairing or replacing the boiler.
Indemnity insurance for windows
When you have new windows or doors installed you should be provided with a FENSA certificate by the fitters. This is a legal requirement in England and Wales since 2002 and means they have been fitted in line with building regulations.
If you are missing FENSA certificates it is common practice to get an indemnity policy to protect you against any losses if your local authority takes enforcement action against you because the window installation doesn’t comply with building regulations.
You can find out more about the paperwork that should be handed over with our guide to Essential House Purchase Documents.
Other common reasons for indemnity insurance:
- Chancel repairs. Where a property is near a church the owner could be liable for costs if the church needs repairs. Indemnity insurance would cover those costs.
- Absence of easement. This is where you have to cross someone else’s land to reach your property. If the ‘right of easement’ (permission to travel over that land) hasn’t been granted indemnity insurance protects you from loss of value.
- Insolvency. If someone has given you money to help with your deposit you could need indemnity insurance. Because, if that person is ever declared bankrupt their creditors could make a claim on your property. Indemnity insurance could protect you from lost value if this occurred.
Who is covered by indemnity insurance?
An indemnity policy covers the person or people buying the property and their successors. If you are taking out a mortgage on the property it also covers your lender.
Can you invalidate indemnity insurance?
Taken out an indemnity insurance to protect you from a problem with your property? Be careful who you tell. It is a common clause in policies that you will invalidate it if you reveal the problem to a third party.
Let’s say you’ve taken out a policy to cover you for a building alteration that doesn’t have planning permission. If you then applied for retrospective planning permission your insurance would be invalidated.
How much does indemnity insurance cost?
The price of indemnity insurance varies. Both the value of your property and what the policy will cover will affect the premium. A one-off policy to cover a risk of chancel repairs could cost you a few pounds. But, an indemnity to cover building work that doesn’t have the right certificates could cost several hundred pounds. Typically, indemnity insurance costs between £20 to £300.
Sadly, this is one insurance policy where you can’t hit the comparison websites to find a better deal. Specialist insurance firms offer indemnity insurance. So, your solicitor or conveyancer will simply present you with a quote.
Who should pay?
This is up for negotiation. Indemnity insurance benefits the new owner so there is an argument for the buyer footing the bill. Indeed, some houses have issues that have been there for years. Every new owner will assess the risk afresh and decide if they want the added protection of indemnity insurance.
In other cases, the issue may have been something the current owner has not done properly. In this case there is an argument for the seller paying the insurance premium.
And at other times, negotiations mean the cost is split. Usually though, as the insurance is rectifying a problem that could stop the sale, the seller picks up the bill.
Can you pass on an existing policy to a new owner?
Yes. You may have bought the indemnity insurance but it is tied to the property. This means you can hand it over to new owners who will continue to be protected by it.
However, if the property value increases then you may have an additional premium to increase the cover. There is no fee for transferring the benefit of cover to the new owner.
Is it always worth buying indemnity insurance?
If your conveyancing solicitor suggests you purchase indemnity insurance take the time to ask exactly what it is for. Also consider doing some research yourself.
In a recent case, one user of the HomeOwners Alliance website was advised to take out an expensive indemnity policy. It was to cover a lack of planning permission and building certificates for their porch. It came as a surprise as the porch was far from new.
A bit of internet research revealed that the porch had been built in the 1970s. This meant it was completed before there was a legal requirement for building regs. Plus, there was evidence planning permission had been granted.
Indemnity insurance is a last resort to provide protection for a problem that can’t be easily fixed. So, make sure there isn’t a free way to resolve the problem before you put your hand in your pocket.
Ideally, it is always advisable to fix the underlying legal defect rather than taking out the ‘elastoplast’ option of indemnity insurance.
If you do need an indemnity policy make sure your solicitor is arranging it with an ‘A’ rated insurer.