What is Indemnity Insurance, and what does it have to do with Conveyancing?
Indemnity insurance, which is becoming increasingly popular, is a well-established feature of the property landscape in the UK. The concept was actually developed in the US around 125 years ago, as a way of dealing with potential uninsured losses in property transactions.
It quickly became established as a fast, secure way of handling titles and avoiding the complications of solely relying on a Conveyancing Solicitor’s professional indemnity cover. Indemnity insurance is now an essential - and virtually compulsory - element of property dealing in the US, in great part because of a comparative deficiency in US land record laws.
In the UK, its first use was to deal with known title problems, but in recent years insurers have provided a range of policies to cover a wide variety of problems that are encountered in Conveyancing transactions. They have proved to be a vital tool when it comes to resolving problems for property lawyers, providing a quick solution to many . Indemnity insurance now also offers an effective answer to aspects of large-scale due diligence, allowing time and cost to be controlled while offering security acceptable to lenders and rating agencies.
There are two main types of indemnity insurance:
- Defective title indemnity insurance, and
- Good title indemnity insurance
Defective title indemnity insurance
This is often employed where cover is needed because a property lawyer or conveyancer dealing with the conveyancing has discovered a problem which cannot be cured in a conventional way.
It is obtained in order to offer protection to a buyer (and a lender) where there is a defect in the title which cannot be resolved. In theory, indemnity insurance should only be used as a last resort, but in practice it often provides a quick and low cost alternative to the work required to correct a defect (varying a lease for a leasehold property for example will usually cost several hundred pounds in legal fees and will take several weeks).
Unlike a conventional indemnity insurance, a the premium for a indemnity insurance is paid only once, and in most cases is automatically transferred to successors in title and lasts for the life of the property, save that the limit of the cover will be the purchase price of the property and since the indemnity insurance will not be index linked, a premium will usually need to be paid by the insured when they come to sell to increase the limit of cover of the indemnity insurance (assuming that the property is sold for a profit).
It should be remembered, and be pointed out to clients, that indemnity insurance does not remedy the insured defect, but merely offers financial compensation. You should also check each indemnity insurance policy individually to see what actions might invalidate the cover.
For many indemnity insurance policies however, it is a condition that their existence must not be revealed to third parties.