What is indemnity insurance when buying a house? An expert explains

Indemnity insurance is something your conveyancing professional might recommend when you’re homebuying. It’s arranged to provide protection but it can come at a cost to you rather than, or together with, the seller so can add to your spend on a home.

When you’re buying a house your conveyancer’s work can identify legal defects with a property and that’s when they might suggest taking out an indemnity policy. While that sounds daunting, indemnity insurance can be a sensible solution to an issue.

We’ve put together all the details on what indemnity insurance is and when you might need it so you can be prepared if it’s suggested during the process of purchasing a home.

What is indemnity insurance?

Indemnity insurance – specifically, title indemnity insurance – can provide cover when legal defects are identified.

“Title indemnity insurance is a type of insurance policy providing protection to a property owner for claims arising from a legal defect in their title to the property,” explains Lorna du Sautoy, a partner at the law firm Broadfield.

It’s important to be aware of what it does and doesn’t do, however. “Title indemnity insurance does not remedy the defective title,” says Lorna. “It provides compensation for financial loss arising from the defect.”

Indemnity insurance isn’t always recommended. “A conveyancer will only recommend indemnity insurance if the problem at hand cannot be solved or if it is not practicable to solve it due to the time constraints of the transaction,” explains Natalie Beard, conveyancer at SAS Daniels.

Lorna du Sautoy

Lorna du Sautoy is a partner at the residential property team at the law firm Broadfield. She acts for individuals buying, selling and renting property in the UK as well as investors, developers and funders. 

Natalie Beard

Natalie Beard is a conveyancer in SAS Daniels’ residential property team. She has nine years’ experience working in conveyancing and is experienced at dealing with both existing homeowners and those embarking on the property ladder for the first time.

When might indemnity insurance be worth buying?

The need for title indemnity insurance typically arises when you’re buying a home, although it can be obtained at any time, points out Lorna du Sautoy. There are some common issues for which it’s taken out:

Absence of permission and consent

Lack of planning permission, listed building consent or building regulations approval for the construction, alteration or extension of a property might become apparent. The insurance is to “cover the risk of enforcement action being taken in respect of unauthorised works”, Lorna says.

“Depending on the nature of the works and when they were carried out the risk of enforcement action being taken may be remote and therefore the insurance policy provides appropriate comfort to a buyer,” she explains.

Lack of rights of access

Lack of formal rights of access over land that is owned by a third party is a further issue that can come up. “Here the insurance policy is obtained for the risk that the property owner is prevented from this access in future and to cover the cost of obtaining the necessary rights of access, the cost of constructing an alternative access where sufficient rights do exist or the reduction in value of the property as a result of the lack of rights,” Lorna explains.

“The cost and availability of such insurance will depend on the length of time the access has been in use and whether or not the third party land owner has been identified or has complained in any way,” she says.

Breach of title conditions

Title conditions are rights and obligations and breach of a title condition such as a restrictive covenant which is capable of enforcement by a third party are another reason indemnity insurance might be sought. “Typically this is best used where the person with the benefit of the covenant is not known or cannot be found,” Lorna says.

What to be aware of when taking out indemnity insurance

If you take out indemnity insurance, be aware that there’s something you shouldn’t do. “Notifying the potential claimant under an indemnity insurance policy about the title defect will invalidate the policy,” says Lorna du Sautoy.

“Caution should be taken when considering indemnity insurance cover for historic unauthorised works,” she adds. “In particular, there should be no claims for retrospective consent or contact with the local authority in relation to the issue. This could include submitting plans for any redevelopment or permitting the local authority to inspect the property.”

How much does indemnity insurance cost?

There isn’t an amount you can count on paying should you need indemnity insurance. “The cost will vary depending on a number of factors such as the risk you wish to cover, the value of the property and the insurer you select,” says Natalie Beard.

“It is a singular payment often collected on completion and the terms of the policies can vary and thus it is important to check if new cover will be required after a number of years.”

Where can I buy indemnity insurance?

Your conveyancer will arrange the insurance and advise you about its suitability to your needs, says Natalie Beard. “Quotes can be obtained from insurers and the conveyancer will then either select the one they believe to be most appropriate or approach their buyer client with a selection they consider suitable,” she says.

“There are often policy assumptions that will need to be confirmed before offering the policy to a buyer and these will be sent to the seller’s conveyancer for the seller to confirm,” she continues. “Once an agreed draft is in place, the policy will then be taken out on completion of the transaction thus covering the buyer for the insured risk once they legally own the property.”

Who usually pays for indemnity insurance?

When it comes to which party picks up the bill, this varies. “The starting point is that the seller is responsible for the cost of the indemnity insurance as it is their obligation to ‘cure’ any defects in title,” says Lorna du Sautoy.

“However, it can be that the buyer has unique circumstances or plans for the property or a heightened risk tolerance and it is not unusual for a buyer to take out cover or for the parties to share the cost.”

You can think of indemnity insurance as “essentially a plaster to the wound of the problem”, says Natalie Beard. “It does not solve the problem but rather seeks to financially protect the buyer (subject to its conditions and exclusions) from certain financial losses arising from an insured risk.”