What is Indemnity Insurance?
We all know that being a homeowner comes with a lot of responsibilities, from making your mortgage payments, to keeping your property in good repair. However, sometimes when buying a home it’s possible that you might be taking on responsibility for more than you bargained for…
By taking over the deeds to a property you can become legally liable for a number of things, from illegal extensions carried out by previous owners, to paying for repairs to a nearby church!
Building indemnity insurance is designed to offer protection against any costs that you might incur owing to any form of liability (generally a liability that you were unaware of at the time of purchase) that would fall on you as the owner of a property.
Obtaining a Policy
Normally, insurance is taken out during the process of a sale as, if either party is concerned about liabilities attached to the property, having a policy put in place can help the transaction to go through. As you’d expect, it is normally the sellers that are expected to pay for the policy, however, there are some mortgage lenders who require that this type of insurance be in place before they’ll allow you to borrow. If you’re buying and you need a mortgage, should the seller refuse to pay for the insurance, you may find yourself forced to fork out for it yourself.
As there are various liabilities you can face as a property owner, some of which are dependent on fairly convoluted laws and regulations, it can be hard to know just how at risk you are of being hit with an unwanted expense. In general, where there is any doubt, your solicitor will advise you take out a policy and, as mentioned above, some lenders will insist on it.
Indemnity policies need to be purchased through a third party such as a solicitor or conveyancer as the companies that underwrite such policies do not deal with the general public owing to the expertise required to fully understand the ins and outs of these products. As the legal issues connected to the liabilities you might want to insure against can be fairly complex, you should make sure the professional representing you makes the important details of the policy as clear as possible.
Unlike other forms of insurance, the cost of indemnity insurance for home owners isn’t calculated according to the level of risk involved (which is usually minimal and, as mentioned previously, sometimes hard to ascertain). Instead, it’s linked to the value of the property in question.
Due to the low risks involved, the premiums you’ll be expected to pay are usually fairly low. You can expect to pay between £50-£500 depending on price of the house and what it is you’re insuring against. Once the insurance has been purchased the property is covered permanently for whoever is living there.
Types of Cover
Depending on the type of property in question there are a wide range of liabilities that might be loaded on to you as the owner. Here’s a look at some of the different eventualities that are commonly insured against;
No Planning Permission/Buildings Regulations
This is one of the most popular forms of indemnity insurance for home owners. It’s used to protect the policy holder from costs and complications that might arise should it come to light that pervious building work done on the property did not have appropriate planning permission from the council, or failed to follow building regulations. This is a risk as, even though you weren’t responsible for the work, the council can still take action against you as the owner of the property.
In some cases, if the council do take action, the remedy will be as simple as applying for planning permission retrospectively. However, you could be forced to remove an offending structure at your own expense, or you may be barred from using the property for a certain purpose. If you fail to carry out work ordered by the council via an enforcement notice you will not only have to pay for the changes (assuming you aren’t insured) you could also be hit with a £25,000 fine. Failure to pay this fine can result in imprisonment.
Whilst this may sound intimidating, bear in mind that it in reality, it’s a fairly rare occurrence that such actions are taken. On top of this, for a single dwelling house, there is a four year time limit after which the council cannot take action (it’s ten years for other types of property.) Nevertheless, if you are worried about a lack of planning permission/building regulations for work carried out on a property, indemnity insurance can provide peace of mind in that, as well as covering the cost of any alterations that have to be made, it will also payout so as to compensate you if the property’s value is lowered as a result.
These policies can be invalidated if incorrect statements about when the work in question was completed are given to the insurer. Likewise, you cannot normally get indemnity insurance if there’s been contact with the council with regards to the building work in question during the three months previous to taking out the policy. If the policy holder brings the insured work to the attention of the council after obtaining a policy, it will also be invalidated. (As a result you can not use this form of insurance as a way of avoiding applying for planning permission if you are planning on carrying out a project yourself.)
If the documents on a house forbid certain alterations which previous owners have carried out regardless, you could be forced to rectify the situation. A restrictive covenants indemnity policy will cover you against liability for the costs of any ensuing legal expenses or additional work that may be ordered by a court should a broken covenant be discovered and enforced on you.
As well as protecting you from the costs you might face in honouring a covenant, your policy will also compensate should your property lose value as a result of changes that have to be made. You can also use such policies for protection if you are self-building on a plot of land which may be subject to covenants which were applied to it as part of a previous sale and could affect your project.
Normally cover will only apply if the covenant was breached at least 12 months before the policy was obtained and was done so without the knowledge of the holder. Disclosing the existence of such a policy to anyone other than mortgage lenders or buyers for your property can also invalidate your insurance.
Again, these policies are purchased through third parties. You should ensure they explain to you fully what covenants might apply or potentially be breached and how this would affect your life in the property. Bear in mind, that if a covenant is breached and changes have to be made, simply getting monetary compensation from your insurance may be adequate to you. For instance if you have to significantly change your dream home, you may feel you’d have been better of not buying in the first place.
Absence of Easement
This type of policy insures against the risk that a lack of access rights could affect the way you maintain and use your property. For example, there might be a water pipe running through a neighbouring field for which no easement can be provided.
Your policy will help you pay for legal expenses incurred in obtaining legal access or creating new access. You’ll also get compensation should the changes that have to be made reduce the value of the property.
Chancel Repair Liability
There’s an archaic law that can end up placing the responsibility for the up keep of a nearby church with the owner of a house. In about 5,000 parishes throughout the UK churches are able to demand money for repairs from the owners of properties built on ex-monastery land, who are, technically speaking, de facto lay rectors.
Though many churches are understandably shy about enforcing this law, which dates back to pre-reformation times, there have been notable casualties. In 2009 a Warwickshire couple were actually forced into selling their farm after it was judged that they were legally responsible for paying a bill for £230,000 worth of repairs to the local church.
It can be hard to find out if this applies to your home or one that you’re thinking of buying, and if it does it can be hard to assess how many people the responsibility is divided amongst. Either way, indemnity insurance can help you to negate this risk by covering you for any costs incurred if the law is enforced on you.
The Insolvency Act
If a property is gifted to a child by a parent who then proceeds to go bankrupt within the next seven years, the property reverts to their estate. If this is a concern for you, you can insure against the risk that you’ll have to pay to protect your interest in the property.
(Note this product is not aimed at those giving property as a gift, or those receiving it as a gift or undervalued, but owners or mortgage payers paying for its full value.)