What is an indemnity policy in conveyancing and when is one used?

Introduction to indemnity policies in conveyancing

In most property transactions in England and Wales, the conveyancing process aims to identify and resolve any legal issues before completion. However, sometimes these issues cannot be fully addressed in time, or the cost of resolving them would be disproportionate. In such cases, an indemnity policy may be recommended to provide insurance against risks that could affect the property after purchase.

An indemnity policy is not a legal remedy but rather a form of insurance. It protects the buyer (and often their mortgage lender) from financial losses caused by specific title defects, missing documentation, or breaches of restrictive covenants which might come to light after the purchase has completed.

When is an indemnity policy used?

Indemnity policies are usually considered when there is a risk that cannot be eliminated by straightforward legal investigation or remedial action. Common examples include:

• Missing building regulation or planning permissions for work done by a previous owner
• Unknown rights of way or access issues that are not registered
• Historical breaches of restrictive covenants or easements that affect the property
• Unregistered land or property with incomplete Title Register information
• Issues identified in local authority searches that pose potential future liabilities
• Squatters’ rights or adverse possession claims that have not yet crystallised

When such issues arise, a conveyancer or solicitor will often suggest purchasing an indemnity policy to address the residual risk. This allows the transaction to proceed while providing insurance against future claims relating to these pre-existing problems.

Types of indemnity policies in conveyancing

There are different indemnity policies tailored to particular risks, including but not limited to:

• Title indemnity policies deal with defects in the property’s title that affect ownership or rights
• Missing documents policies cover missing paperwork like deeds, conveyances, or planning consents
• Restriction indemnity policies cover breaches of restrictive covenants or planning restrictions
• Local authority indemnity policies protect against liabilities discovered during searches related to planning or highways

The specific coverage and terms vary depending on the insurer and the risk involved, so buyers should always review the policy details carefully with their conveyancer.

How indemnity policies work

Once purchased, the indemnity policy remains in place indefinitely (or for the policy period specified). If a claim arises that is covered by the policy, the insured party can seek compensation from the insurer. This compensation generally covers legal costs and any losses incurred.

For example, if after buying a house it appears that certain extensions were built without planning permission and a local authority penalty is imposed, the indemnity policy may cover those costs.

It is important to note that indemnity policies do not 'fix' the legal problem itself. Instead, they provide financial protection should the problem cause a loss or claim in the future.

When indemnity policies are most commonly needed

Some situations where indemnity policies are frequently arranged include:

• When buying leasehold properties where some documentation or management information is missing or incomplete (see Leasehold conveyancing)
• Purchasing property built without final building regulation certificates or planning approvals (see selling without building regulations certificates)
• Properties with unregistered rights of way or access easements that could cause future disputes
• Unregistered land where the title has gaps or is unclear (see unusual property searches)

Indemnity policies can also be helpful in specialist conveyancing matters or when dealing with properties that have unusual or complicated legal histories (see specialist conveyancing).

Limitations and considerations

While indemnity policies provide peace of mind against certain risks, there are some important caveats:

• They do not guarantee that all risks are covered – standard residential conveyancing insurance policies usually exclude some issues
• Policies generally only cover risks known at the time of purchase, not new developments or defects arising later
• The cost of policies varies depending on the risk and property value, but they are usually a one-off premium
• Insurers may place conditions or exclusions on policies to limit their exposure

Because indemnity policies are insurance products, claims must follow the insurer’s procedures and are subject to policy terms and conditions.

Scotland and Northern Ireland differences

This blog focuses on England and Wales conveyancing. It is worth noting that property law in Scotland and Northern Ireland differs considerably, with different systems for land registration and conveyancing processes. Indemnity policies exist in some form but work differently, so advice should always be sought locally if buying in those jurisdictions.

How we can help

If you are buying or selling a property and an indemnity policy is recommended, Affordable Conveyancing can help you find a regulated conveyancer who can explain the details and find fixed-fee quotes for you. We specialise in handling complex or unusual property transactions and can assist with leasehold properties, new builds, or anything needing specialist attention.

To get started with a free, no-obligation quote, please visit our quote page and find out how affordable and straightforward conveyancing can be.

This guide is general information about the law in England and Wales as at the date shown above. It is not legal advice. Every property is different, so ask your conveyancer about your own situation. More in Conveyancing problems and how they're solved.