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If you are selling or buying a property, you may be advised that you need an indemnity insurance policy. We look at what this is and why it is necessary.

It can be frustrating to find out that a property sale cannot go ahead unless an indemnity insurance policy is purchased, and this can cause irritation at what is already likely to be a stressful time.

What is an indemnity policy?

An indemnity policy is an insurance policy that will provide cover in the event that a problem arises from a risk or defect relating to the property. Examples of issues that an indemnity policy could cover include:

• Missing documents, such as a missing deed
• A defect in the legal title
• A lack of planning permission for an alteration, such as an extension
• Use of land in contravention of a restrictive covenant, for example, altering the property without obtaining the consent of the person with the benefit of the restrictive covenant
• Lack of an easement, for example, no document granting right to way to the property

Why is an indemnity policy needed?

There is a risk, although it is likely to be small, that problems could arise in the future because of the risk or defect in question. For example, the local authority could require an extension to be removed.

The indemnity policy aims to provide financial cover for the expense of complying with the requirement. It will not resolve the problem; for example, any defect in the legal title will still exist.

It is a faster and more cost-effective way of resolving an issue than trying to remedy it, for example, by obtaining retrospective planning consent.

Who should pay for an indemnity policy?

It is common for the seller to be asked to pay for an indemnity policy, which will provide ongoing cover for the buyer. This is because they are selling the defective property and it could be argued that they should provide the protection.

In some cases, an indemnity policy may not be deemed essential, and you may wish to make this point. For example, if alterations to the property were made many years ago, it could be argued that it is unlikely that the local authority will take enforcement action.

Do I have to have an indemnity policy?

If someone is taking out a mortgage to purchase the property, it is likely to be a condition of the mortgage that an indemnity policy is in place. In this case, the purchase will not be able to proceed without the policy.

You will need to take a view on whether you wish to pay for the policy or risk the transaction falling through if the buyer refuses to fund this themselves.

Contact us

For further advice or information please contact one of our Residential Property experts.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.