Indemnity insurance, or title insurance, is a type of insurance policy that protects property buyers and their mortgage lenders against financial losses caused by specific legal issues relating to a property.
Unlike buildings insurance, which covers damage from events such as fire or flooding, an indemnity policy covers risks associated with legal defects, missing documents, or historic issues that could affect a property’s value or ownership.
If you’re buying or selling a property, you may hear your conveyancer mention indemnity insurance during the conveyancing process, however it is nothing to be worried about. This insurance is actually a common and straightforward option used to help property transactions move forward when certain legal issues arise.
In many cases, these issues are unlikely to ever cause a problem. However, because there is a potential risk, a lender or buyer may require indemnity insurance for added protection.
In this guide, we’ll explain what indemnity insurance is, why it is used when buying or selling property, and when you might need it.
Why is indemnity insurance used in property transactions?
During the conveyancing process, solicitors carry out checks on a property to identify any legal concerns before the sale is completed.
Sometimes these searches and checks reveal issues such as missing paperwork, unclear rights, or historic alterations that cannot easily be resolved. Rather than delaying or risking the sale falling through, an indemnity insurance policy can provide financial protection against the potential consequences of those issues.
This allows buyers, sellers, and lenders to proceed through the transaction with greater confidence.
When do you need it?
There are several situations where indemnity insurance may be recommended or required:
Missing building regulations certificates
If previous owners carried out any works on the property, such as an extensions, loft conversions, new windows or structural work, but the relevant building regulations certificates cannot be provided, indemnity insurance may be used to protect against enforcement action, such as councils requiring you to alter or remove any changes that cannot be shown to be compliant.
Lack of planning permission
Some properties have alterations or developments where evidence of planning permission is unavailable. If getting this documentation is not possible, an indemnity policy may provide protection against future challenges by the local authority.
Restrictive covenant issues
A restrictive covenant is a legal condition attached to a property that limits how it can be used. For example, a covenant may prohibit extensions or running a business from the home.
If there is evidence that a covenant may have been breached, indemnity insurance can help protect against claims from parties who benefit from the covenant.
Right of way disputes
Properties sometimes have unclear access arrangements or undocumented rights of way. Indemnity insurance can provide cover if a dispute over access happens in the future, covering legal costs and reduction in value of the property.
Missing easements
An easement gives someone the legal right to use part of another person’s land for a specific purpose, such as access to a driveway or drainage system. If documentation is missing, and this access is challenged then an indemnity insurance may be required.
Chancel repair liability
Chancel repair liability is a historic legal obligation that can require some property owners in England and Wales to pay towards the cost of repairing the chancel of a church. It is uncommon today, but can still affect certain properties. Taking out Insurance can help to protect against these unexpected costs.
Who pays for indemnity insurance?
There is no fixed rule regarding who should pay, although the starting point is usually that the seller should provide the insurance as the “defect” is within their title.
However, buyers sometimes choose to purchase the policy themselves if the seller refuses, or for additional peace of mind.
How much does it cost?
The cost of indemnity insurance depends on several factors, including:
- The type of issue being covered
- The value of the property
- The level of risk involved
- Mortgage lender requirements
One of the advantages of indemnity insurance is that it usually involves a single one-off payment rather than an ongoing annual premium.
Many policies cost between £20 and £500, although if the issues are complex, or standard policy assumptions cannot be satisfied, they could be higher, depending on the issue.
What does indemnity insurance cover?
While coverage varies depending on the policy, indemnity insurance may cover:
- Legal costs associated with defending a claim
- Compensation payments if a claim is successful
- Financial losses resulting from a covered issue
- Reduction in property value caused by the problem
- Costs incurred by mortgage lenders
The exact terms will depend on the insurer and the type of indemnity policy purchased.
What doesn’t indemnity insurance cover?
It’s important to understand that indemnity insurance has limitations.
It generally does not cover:
- Structural defects in the property
- Future alterations carried out without permission
- Problems that are already known to local authorities
- General property maintenance or repair costs
- Issues outside the specific risk identified in the policy
Your conveyancer will explain exactly what the policy covers before you proceed.
Is indemnity insurance a cause for concern?
Not necessarily, many buyers become worried when indemnity insurance is mentioned, assuming there might be a problem with the property. In reality, indemnity insurance is commonly used in residential property transactions across the UK.
Often, the issue being covered is historic and unlikely to cause any future problems. The policy simply provides financial protection just in case a claim or challenge does arise.
For many transactions, indemnity insurance is the quickest and most practical solution available.
Can a mortgage lender require indemnity insurance?
Yes, mortgage lenders want to make sure their investment is protected. If a legal issue could affect the property’s value or saleability, the lender may insist on indemnity insurance before they will release mortgage funds.
Your conveyancer will usually arrange the policy if it is required by the lender.
Benefits of indemnity insurance
There are several reasons why indemnity insurance is widely used in property transactions:
Helps keep the sale moving
Resolving legal defects can sometimes take months. Indemnity insurance often allows the transaction to proceed without long delays.
Provides financial protection
The policy can help cover legal costs and financial losses if a covered issue becomes a problem.
Reassures buyers and lenders
Having a policy in place can provide confidence that risks have been managed appropriately.
Usually requires only a one-off payment
Unlike many other insurance products, most indemnity policies are paid for once and remain in place indefinitely.
Frequently asked questions
Is indemnity insurance mandatory?
No, however, your conveyancer or mortgage lender may recommend or require it in certain circumstances.
How long does indemnity insurance last?
Many property indemnity insurance policies provide cover indefinitely, as it is tied to the property, not the owner.
Can I buy indemnity insurance after completing a property purchase?
In some situations, yes. However, it is usually arranged during the conveyancing process when the issue is first identified and can be harder to obtain once the transaction has completed.
Does indemnity insurance cover future property alterations?
No, most policies only cover the specific issue identified when the insurance was taken out.
Is indemnity insurance worth it?
For many buyers and sellers, this insurance provides an affordable way to protect against potential legal risks and avoid delays during a property transaction.
Indemnity insurance plays an important role in many property transactions. While legal defects, missing paperwork, or historic property issues can sound alarming, they don’t always need to prevent a sale from going ahead.
By providing financial protection against specific risks, it helps buyers, sellers, and lenders proceed with confidence. If your conveyancer recommends an indemnity insurance policy, take the time to understand what it covers and why it is being suggested. In many cases, it can be a simple and cost-effective solution that keeps your property transaction on track.
