During a property transaction, unexpected legal issues can sometimes arise — issues that could delay or jeopardise a sale. In many cases, an indemnity insurance policy can provide a practical solution to enable the transaction to proceed in a timely manner.
What is Indemnity Insurance?
Indemnity insurance protects the buyer (and sometimes the mortgage lender) against potential future legal claims or enforcement relating to a defect with the property. Instead of trying to fix the issue — which could be costly, timely or impossible — indemnity insurance provides financial protection if someone would attempt to enforce their rights in the future.
It is a one-off premium paid during the transaction and usually continues indefinitely, covering future owners and often respective mortgage lenders, however sometimes an uplift of the policy limit is required to keep this in line with the value of the property.
Common situations where Indemnity Policies are used
Some typical examples include:
#1 Lack of Building Regulations or Completion Certificates
When certain types of building works are carried out, such as extensions, loft conversions, structural alterations, electrical work, boiler installations or removals of load-bearing walls, they usually require Building Regulations Approval and a Completion Certificate issued by the local authority on completion of the works.
A Missing Building Regulations or Completion Certificate indemnity insurance policy would cover where a property has had building work carried out without the proper approvals or without receiving the completion certificate for the works.
This indemnity policy is designed to protect the purchaser and their mortgage lender from losses arising from enforcement action by the local authority.
#2 Restrictive Covenant Breaches – Leasehold or Freehold
A restrictive covenant is a legally binding rule included in Title Deeds or a Lease which restricts how the property can be used. A common example is not to build an extension or conduct alterations without consent.
If a covenant has been breached, the person with the benefit of the covenant (such as a management company for example) may be legally entitled to demand the breach is put right, seek compensation or require the removal of an extension or alteration. This would present a risk to the purchaser of a property and their mortgage lender.
A Restrictive Covenant Breaches indemnity insurance policy is used where there has been, or may have been, a breach of covenant, and there is a risk that the person with the benefit of the covenant could enforce it in the future. It protects the purchaser and their mortgage lender from financial losses arising from enforcement action.
#3 Missing Particulars – Unknown Restrictive Covenants, Rights and/or Easements
This type of indemnity insurance is used when old Title documentation is incomplete, missing or unclear, making it impossible to confirm whether any restrictive covenants apply, whether anyone has rights over the property or whether the property should benefit from any rights or easements.
Because the wording such missing documents cannot be checked, there is a risk that unknown legal burdens may exist. An old Deed may refer to a Conveyance which is missing, or the Title may note that a document was not supplied to the Land Registry on first registration of the property. To manage the risk, a Missing Particulars indemnity insurance policy can be taken out.
The indemnity policy would cover a purchaser and their mortgage lender from financial losses if somebody was to later claim a right or covenant contained in the missing/unknown documents. Protections include claims for breach of unknown restrictive covenants, claims that third parties have rights over the land and legal costs.
Why not simply fix the issue?
Sometimes trying to fix the issue would trigger the very problem insurance is designed to avoid. In such circumstances, any potential indemnity insurance policy may be rendered invalid. For example, contacting a third party for retrospective consent may alert them to a breach, causing the indemnity insurance to be invalid.
Indemnity insurance policies are almost always conditional on the issue remaining undisclosed. These policies provide a quicker and often much cheaper solution, which would allow the transaction to proceed whilst also covering the risk.
Does Indemnity Insurance cover poor workmanship?
No — it only covers the legal risk, not any physical or structural defects. For example, if a conservatory does not meet safety standards, insurance would not pay for repairs however the policy will protect a purchaser against the local authority enforcing the absence of approval.
We would recommend a survey be carried out if you are unsure on the quality of works done at a property you are purchasing. Indemnity insurance is a legal tool, not a replacement for a building survey or professional inspection.
How do you know if you need it?
Your conveyancer will advise you if an issue comes to light during their title investigation, when reviewing the search results or when raising enquiries with the seller’s solicitor. If there is anything missing, unclear or potentially problematic, your conveyancer will explain the nature of the risk and whether an indemnity insurance policy is appropriate.
Because lenders insist that the property is good security for a mortgage, they often require this protection. For example, if paperwork is missing a lender may refuse to proceed without an indemnity insurance policy due to the risk of enforcement or the property being devalued.
Indemnity insurance has become a common tool to keep transactions moving when historical documents are unavailable. Older properties in particular often have missing records simply because documents were never digitised or have been lost over decades of ownership changes.
How we can help
Buying or selling a property can already feel overwhelming without the added concerns of missing documents, old covenants, uncertain rights or incomplete records. Indemnity insurance policies help to ensure that minor legal issues do not delay or derail a sale.
At O’Donnell Solicitors, we regularly advise our clients on these matters and arrange appropriate protection for our clients where needed — helping secure peace of mind against enforcement, ensuring the lender is happy to lend, and avoiding unnecessary delays whilst also protecting future sales. If you need any assistance, please do not hesitate to contact our team at enquire@odonnellsolicitors.co.uk or call us on 01457 761320.
