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Risky Business - Is indemnity insurance an unnecessary expense?By: Sarah Manley, commercial property solicitor at Clarke Willmott LLP, Taunton

Sarah Manley, Clarke Willmott LLP

It is often the case when buying or selling property, that there is some 'problem' or 'risk' with the property. This could, for example, be lost title deeds, or a property having a potential chancel repair liability or a lack of planning permission. Especially when a lender is involved in the transaction, it is not always possible to take a view, and one of the parties (in a buyer's market, expenses can increasingly be pushed onto the seller) must decide whether to seek to resolve the risk once and for all, or simply to insure against the risk. This type of insurance is known as indemnity insurance.

Why insure? 

An initial reaction may be that it would always be better to resolve the risk where it is possible to do so. Although this may be true in theory, in reality most parties simply want to get to completion of a transaction as quickly as possible, and at the lowest cost. The time, and therefore cost, involved in a lawyer working on and trying to resolve the risk (with no guarantee of success at the outset) is likely to far exceed the cost of paying for indemnity insurance against that risk, and so indemnity insurance is increasingly used to get a transaction to the point of completion more quickly.

What is indemnity insurance?

Legal indemnity insurance is a type of insurance policy used in property transactions where there is some sort of legal defect or risk which cannot be resolved at a reasonable speed or cost (or at all). The risk will be reasonably unlikely to cause any actual loss but does have the potential to cause a significant loss.

For example, a buyer may be buying property accessed over a private road. The seller was unaware that the road was private and has always used it for access without challenge of difficulty. However, on checking the property's title, the buyer discovers there is no legal right of way from a public highway to the property – the property is landlocked. Should the legal owner of the private road come forward and refuse access, the property could not be accessed at all (well, possibly by helicopter!) and would be virtually worthless. In this situation, the buyer may well decide to insure for the value of the property, or the cost of purchasing the right of way, just in case this risk comes to fruition.

Unlike other types of insurance, only a one-off premium is paid, and the cover will usually last forever. If a mortgage is being used for the purchase, the lender's interest will often be insured jointly with the buyer. The higher the lever of cover that is required, then the higher the premium will be, although most policies cost only a couple of hundred pounds – a small price to pay when compared with paying a lawyer to resolve the risk or, worse, the potentially risk actually being realised.

The turnaround is quick too, with most insurers being able to provide a quotation within an hour or so of being furnished with the relevant facts.

Is indemnity insurance always the solution?

Not necessarily. If your plans for the property involve doing something which may put a potential claimant on notice, then those actions will almost certainly invalidate the indemnity cover.

For example, a buyer obtains indemnity insurance for lack of planning permission. After completion, the buyer intends to carry out further works, and a planning application is required. In making that new application the buyer is inviting the local planning officer to visit inspect the property, which runs a high risk of the original breach of planning law being discovered and enforcement action being taken by the local authority. The buyer's actions are likely to prevent a successful claim under the policy.

It is always best to talk to your lawyer about your long term plans for a property being purchased, as well as the immediate plans, so that the best advice can be given at an early stage as to the most appropriate way to deal with a risk – whether by purchasing indemnity insurance or an alternative approach.

Sarah keeps fit by chasing around after her two-year old daughter and Vizsla dog.

Features May 2012

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