Residential Conveyancing News

Legal Indemnity Insurance - the panacea for all property title defects? Mike Read

Increasingly, Legal indemnity insurance is being offered by Sellers or demanded by Buyers in order to protect the Buyer (and their lender) from perceived defects in title which cannot otherwise be resolved. Legal indemnity insurance has been around for a considerable number of years but whereas it used to be used as a last resort, it now tends to be seen as offering a quick and low-cost alternative to the work that might otherwise be required in order to remedy the defect. Unlike a conventional insurance policy the premium for a legal indemnity insurance policy is paid only once, and the benefits of the policy are normally transferred automatically to successors in title, although the level of actual cover may have to be increased in line with the value of the property.

Legal indemnity insurance does not of course remedy the defect in respect of which the insurance is effected, it simply offers financial compensation in the event of that defect resulting in a financial loss. Premiums are generally charged on a sliding scale depending upon the value of the property and they also vary depending upon the nature of the risk insured. Typical premiums on residential properties may be as little as £20 or as much as £300 or even more if the risk being been insured against does not fall into one of the many standard categories.

There appears to be little evidence available as to how often claims are actually made on standard residential property indemnity insurance policies but the perceived wisdom is that such claims are exceedingly rare. The same technical title defect might well have been in existence for a great many years and whereas in the past a judgment would have been made as to whether or not the nature of the ‘defect' was such that there was a genuine likelihood of a problem arising, the common approach nowadays is simply to pay the premium and effect the indemnity policy however remote the possibility of an actual claim might be. Rather than throw money at insurance companies an alternative approach might be to consider the nature of the perceived risk in more detail before deciding whether a legal indemnity insurance policy is really necessary or appropriate or the only solution to any particular situation involving a defect in title.

There are however some circumstances where the fairly modest cost of an indemnity insurance policy will be justified and some of the more common types of policy would include:

Breach of covenant indemnity insurance: this would be used where for example a restrictive covenant affecting a freehold title has been breached although it should only really be necessary where the breach has subsisted unchallenged for less than 20 years.
Absence of easement indemnity insurance: this policy would be appropriate where for example some part of a property is accessed over private land but there is no apparent legal right to exercise such access or where a property is served by services e.g. drains, cables etc which cross private land again with no obvious legal right. The indemnity insurance in such circumstances would be intended to provide compensation for any financial loss suffered in the event that the use of the right of way or the services was challenged.
Good leasehold title indemnity insurance: a property may be registered with good leasehold title if sufficient evidence of the landlord's right to grant the lease has not been produced to the Land Registry. In the event that the landlord's claim to the superior title was successfully challenged along with the legality of the lease itself then the indemnity insurance would pay compensation, intended to cover the market value of the property.
Lack of planning permission/building regulations approval indemnity insurance: this very common indemnity insurance is routinely effected where property has been built, altered or extended without the benefit of planning permission and/or building regulations approval. The policy should cover financial losses suffered by the owner of the property in the event that the local authority took action for breach of planning or building regulations. This insurance is usually only available for work that was carried out at least 12 months ago and of course effecting indemnity insurance does not mean that building work that may have been carried out without planning permission or building regulation consent is safe. Where building regulation consent should have been obtained but has been overlooked or ignored it is always most important to make sure that any survey of the property pay particular regard to the competence and integrity of the actual building works involved.
Unknown easements, rights and covenant indemnity insurance: this indemnity policy might be used where there are documents which are either known to affect the title to a property or which might affect the title but the documents themselves, or details of their contents, cannot be produced. The documents might also contain covenants or restrictions which are in conflict with the use of the land as it stands - an example may be a covenant not to alter the property which would be breached if an extension had been added. Whilst the indemnity policy cannot prevent any unknown rights from being exercised or covenants enforced, it can provide financial compensation if they are.

It would seem that legal indemnity insurance policies are here to stay and the residential conveyancing market will increasingly rely upon them as the method of choice in dealing with any perceived or actual title defects. However these policies should be chosen and used with care and details of the cover provided should be very carefully checked to ensure that the insured risk is covered and that the insurance company's requirements and conditions have been fully complied with. However remote the likelihood of a claim might be you can rest assured that the insurance companies will be checking the details on any proposal form very carefully before any claim is admitted.

If you are buying or selling a property and have a query regarding legal indemnity insurance or if you require any further advice on a property related matter please contact our Business & Property Services Team on 0151 625 9364, 0151 342 6273 or 0151 647 9381.

Mike Read

This article provides a summary of a recent case/change in law/news item. It is intended for general information purposes only and is not to be relied upon. It does not constitute legal advice and should not be treated under any circumstances as a substitute for legal advice. Lees Solicitors LLP does not accept any responsibility for any loss that may arise from reliance upon the information contained within this article. The copyright in this article is owned by Lees Solicitors LLP and permission must be sought before reproduction or publishing.

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