Indemnity insurance: a universal cure?

05.04.2024

Indemnity insurance is seen by many in the industry as a go-to solution to almost any problem, particularly when trying to keep a transaction on track. However, there are often circumstances where it may not be available or appropriate, and ultimately, may not assist the party taking out the policy with their objective. This article considers that while often helpful in relation to issues that are (or are perceived to be) low risk, indemnity insurance is not always the answer.

Indemnity insurance (sometimes referred to as title insurance) works by insuring the policyholder (and usually their mortgagee and successors in title) against the insured risk. To take a planning breach as a simple example, if a seller has failed to obtain planning permission for some works, the policy would provide cover against the risk of enforcement by the local planning authority. This usually covers:

The cost of additional works required to comply with any enforcement proceedings,
Any diminution in value of the property arising as a result of the enforcement proceedings, and
Any costs incurred by the insured party with the consent of the insurer.

The purchaser has peace of mind knowing that, in the event of enforcement, they will not be out of pocket. More importantly, their purchase can go ahead and, in most cases, their solicitor will be able to confirm to any lender involved that the property has good and marketable title, allowing mortgage funds to be advanced.

The insurer, like any insurance business, is taking the premium in the anticipation that the risk will never materialise. If it does, the insurer would generally attempt to work with the insured to resolve the issue as efficiently as possible. Let’s imagine a strip of unregistered land between the title boundary and the highway, papered up with an indemnity policy. A year after completion the owner of that strip appears and denies the buyer access to their new home, offering the strip for a king’s ransom. The insurer will explore other options for access, negotiate with the ransom strip owner, consider the impact on value of any new accessway available and, normally, take the most cost effective option to resolving the issue.

This brings us to our first shortcoming: if you need to make a claim, the insurer may opt to pay out the diminution in value of the property. That may be an objective figure based on red book valuations from market experts. But of course, that may not be the true value of the loss to the property owner. To take the example above, a purchaser may have searched high and low for a property they could approach down a picturesque poplar-lined drive. The “solution” at the end of their claim may be access via another route that runs between the local recycling centre and crematorium. The subjective value of that treasured feature is not reflected in the objective impact on price. Similarly, the financial cost of your legal fight with the ransomer may be covered, but the insurer cannot remove the stress of that litigation.

Insurance may not always be available or may only be available to protect the lender’s interest. There are certain scenarios that insurers just will not cover as they consider the risk too high: recent works to a listed building, for example. If lender-only cover is available, that is good news for the current mortgage arrangement. However, it does not give the buyer any financial protection, nor does it protect the buyer against a future lender refusing to accept lender-only cover when they come to remortgage. A related point is of course that in relying on indemnity insurance, the purchaser is choosing to take a calculated risk. A future purchaser may simply be unwilling to take the same risk, and the existing owner has thereby reduced their pool of possible future buyers, particularly from those with lenders whose approach may be similarly cautious.

A policy isn’t always the most appropriate solution either. Rather than taking a risk in relation to the unknown identity of a party with the benefit of a restrictive covenant, a purchaser may want to know who that is, so that they can properly seek their consent in relation to the covenant (after all, they are perhaps spending a few million pounds). Indemnity insurance is not a substitute for addressing the issue. To take another example from a recent transaction, a purchaser had works planned for a property for which the existing seller did not have estate consents for their previous refurbishment. Indemnity insurance would not have been suitable because (a) they did not want to buy the house unless they were able to carry out the extensive refurbishment they had planned, and (b) it is likely to be a term of any policy of that nature that an approach to the party that leads to the risk materialising (in this case, an approach to the estate that leads to enforcement in relation to the previous works) will invalidate the policy.

The final point to make is a word of caution. These policies, as with most insurance contracts, are often uberrimae fidei contracts: any material facts must be disclosed to the insurer at the point the policy is taken out. When purchasing or refinancing a property that already has the benefit of a policy, it is often suggested that one simply needs to increase the policy limit so that it is commensurate with the market value; a big tick for the lender. However, care must be taken to ensure that the purchaser is aware of what was, and more importantly what may not have been disclosed at the time of inception. If in doubt, seek a new policy to ensure the existing policy isn’t worth less than the paper it is written on.

To conclude then, indemnity policies can be the grease that keeps the wheels of a transaction turning. They are generally inexpensive, and provide the comfort necessary to buyers and lenders to get their deal over the line. However, buyers and practitioners must consider the issue the policy is being purchased to solve, and ensure it achieves what they are hoping for. Indemnity insurance is not a panacea for any issue that may arise in a property transaction.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.