What Is Indemnity Insurance When Buying a House

What Is Indemnity Insurance When Buying a House

Buying a house in the UK is often filled with excitement, anticipation and a fair share of legal paperwork. During the conveyancing process, you may come across the term indemnity insurance. For many buyers, it can sound complicated or unnecessary, but it often plays a valuable role in helping property transactions go ahead smoothly when certain legal or planning issues are discovered. Understanding what indemnity insurance is, when it is needed and what it covers can help you make informed decisions and feel more confident throughout the buying process.

Understanding the Purpose of Indemnity Insurance

Indemnity insurance is a specialist type of cover that protects property buyers and mortgage lenders against potential financial loss arising from specific legal defects or issues with the property. It does not fix the issue itself or resolve the legal defect but instead provides financial protection if that issue causes a problem in the future. These policies are usually a one off purchase and remain in place for the lifetime of the property ownership.

In practice, indemnity insurance can act as a safety net when something is missing or irregular in the legal documents relating to the house. Rather than delay or jeopardise the transaction, the parties agree to take out a policy to cover the risk, allowing the sale to continue without further legal work or uncertainty.

When Is Indemnity Insurance Required

There are many scenarios in which indemnity insurance might be suggested during a house purchase. One of the most common is when the seller cannot provide evidence of planning permission or building regulations approval for alterations made to the property. This might include extensions, conversions or structural changes. If those works were completed many years ago and no issues have arisen, the buyer may be happy to proceed with an indemnity policy in place rather than delay the sale by seeking retrospective consent.

Other situations include missing title deeds, unknown restrictive covenants, access rights over private roads, or a lack of evidence for rights of way or easements. If there is a legal risk that could potentially lead to a dispute or enforcement action in the future, an indemnity policy can offer a practical solution without the need for drawn out legal battles or costly remediation.

What Indemnity Insurance Covers

An indemnity insurance policy does not cover all risks associated with buying a property, but it does provide financial protection against the specific issue it is designed to address. For example, a lack of planning permission indemnity policy would cover costs arising if the local authority tried to take enforcement action because the proper approvals were not obtained. It might also cover legal fees and the reduction in value of the property as a result of that issue.

It is important to note that the cover does not extend to physical repairs or alterations, and it usually becomes void if you contact the authority or third party about the issue. These policies are based on the risk of a problem occurring, and their value lies in protecting against future action, not solving existing disputes.

Who Pays for the Policy

In most transactions, the cost of the indemnity policy is relatively low compared to the overall price of the property. Prices vary depending on the nature of the issue, the value of the home and the perceived level of risk. Typically, they can range from under one hundred pounds to several hundred for more complex matters.

The question of who pays for the policy often comes down to negotiation between buyer and seller. In some cases, the seller will agree to pay as a way to reassure the buyer and complete the sale quickly. In others, particularly in a competitive market, the buyer may agree to absorb the cost. Either way, the payment is usually made through the solicitor at the point of exchange or completion, and the policy becomes effective immediately.

Is Indemnity Insurance a Substitute for Legal Compliance

While indemnity insurance is a useful tool for overcoming minor legal issues, it is not a substitute for carrying out proper due diligence. If major defects or unresolved legal matters are uncovered during the conveyancing process, it is essential to seek legal advice and consider the long term implications. In some cases, it may still be better to resolve the issue directly, particularly if it affects future development or resale value.

Your solicitor will advise whether indemnity insurance is appropriate and what risks are involved. They will also arrange the policy and ensure that it is correctly worded to match the issue it is intended to cover. Many mortgage lenders also require confirmation that appropriate indemnity cover is in place before they release funds.

Final Thoughts

Indemnity insurance is a practical and often necessary part of the house buying process in the UK. It provides financial protection against specific legal issues and helps prevent delays or breakdowns in property transactions. While it cannot replace good legal advice or thorough conveyancing, it offers reassurance and security when minor legal gaps or uncertainties arise. With the right advice and understanding, indemnity insurance allows buyers to move forward with confidence and complete their purchase with peace of mind.