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INDEMNITY POLICIES
What is an Indemnity Policy?
An indemnity policy is essentially a one-off payment for an insurance policy which protects against a specific risk. This could be a defect in a property or a missing will or another situation with a risk. The risk can be mitigated through the policy. Many indemnity policies last in perpetuity.
What is the Defect?
Aside from a “Search Indemnity” which is a policy taken out in lieu of carrying out expensive and time-consuming searches, most indemnities are sought to cover a potential defect in the property. There are a wide range of possible defects but a few of the more common examples include:
- The installation of fixtures that require building regulations approval without certification;
- A restriction on the title register (for example against building a dwelling) that has been breached;
- A private road leading to the property with no express rights of way to use the road.
Remedial Action
In most circumstances, an indemnity is not the only remedy available. It may even be possible to ignore the defect, just as you might choose to purchase a house with a defective roof. If there is a lender involved, however, they will generally not be prepared to take any risk and will require remedial action or an indemnity.
Remedial action could involve resolving the defect. For example:
- Regularise a lack of building regulations by the council round to provide retrospective certification;
- A restriction on the title register can potentially be discharged by application to the Lands Tribunal;
- A deed of easement permitting access over the private road can be drawn up with the owner.
However, what all of these have in common is that they generally take longer and cost far more than obtaining an indemnity policy. It is also often a choice between remedial action or an indemnity – in most circumstances you cannot attempt one then try the other.
What Does an Indemnity Policy do?
An indemnity policy provides financial assurance should the risk arise. If compensation becomes payable as a result of the defect, the indemnity policy should cover the cost. You should check the assumptions in the indemnity policy carefully to make sure they are correct and there is no exclusion which would invalidate it.
One common exclusion is that you must not bring the defect to the attention of anyone who might make a claim. So if you went to the council, Lands Tribunal or the person who might enforce the breach that would invalidate the indemnity policy. This means that you can generally either obtain an indemnity policy or attempt remedial action, but not both.
Risk of Enforcement
A defect in a property should not necessarily be a reason not to purchase it. In the vast majority of cases, no claim is ever made in relation to the defect. Hence indemnity policies which provide hundreds of thousands of pounds worth of cover can generally be purchased for just a few hundred pounds. The risk of enforcement is low but the cost of a claim can be very high. The low risk of enforcement action in most cases should be very reassuring and our professional advice is always to give proper consideration to mitigating any potential risk.
If you are considering an indemnity policy for your property or another matter, please consult us for professional advice.