What is contingent building indemnity insurance?
Contingent Building Indemnity Insurance is a one-off policy that the buyer will purchase when buying a flat, if the buyer’s Conveyancing Solicitor discovers that there is an issue with the current buildings insurance policy.
This is essential if the Solicitor’s enquiries reveal that the level of buildings insurance is not adequate.
For the Solicitor to recommend that the buyer should purchase such a policy, he/she would believe that in the event of the need to claim on the current buildings insurance, the buyer would be likely to suffer loss. In some cases, the loss may be so great that the buyer risks losing his home.
In just such a catastrophic (but not impossible) scenario, the lender, if there is one, would not even be able to recover his loan, as the property for the mortgage would effectively no longer exist!
It is usual for details of buildings insurance requirements to be set out in the lease, and the landlord or managing agent to be responsible for insuring the building according to these requirements and for collecting a proportion of the premium from each of the lessees (the owners of the flats).
If the buyer is obtaining a mortgage, it is likely that the buyer’s solicitor will be also acting for the lender. Each lender has a list of requirements that are set out in part 2 of the Council for Mortgage Lender’s (CML) handbook for the risks that must be covered.
The buyer’s Conveyancing Solicitor will be obligated to check that the buildings insurance adequately protects the lender. It is often the case that the insurance requirements in older leases are less than those required by the CML.
When is Contingent Buildings Insurance Indemnity a necessity?
1. The sum insured on the policy is not adequate
Every insurance policy sets out the total sum that is insured and the re-instatement value of the property.
This is the amount that the insurance company will pay in the event that there is a major claim and the building is badly damaged and may need to be rebuilt. The solicitor must check that the sum is adequate and in the event of a serious claim, the policy is adequate and will pay out enough to rebuild the building.
2. The policy does not meet the requirements of the lender and additional risks need to be added to the policy
The risks that the lender requires to be covered may be more extensive than the risks covered in the policy. The other owners of the flats may refuse to have their premium increased to include these risks or the particular insurance company may not cover these risks.
3. Inadequate provision in lease re-insurance
If it states in the lease that the building will not necessarily be rebuilt in the event of extensive damage and the lease can at this point come to an end.
The lease may state that in the case of serious damage to the property, the lease can come to an end. This will leave the owners without properties and the lender without an asset to sell to recover their loan.
4. The buildings insurance policy on the building has not been renewed
The landlord is still collecting the insurance premium but has forgotten or perhaps decided to cut costs and not renew the insurance of the building.
5. The lease does not contain a clause about insuring the building
If this clause is missing, the landlord may not believe he is responsible for insuring the property and the solicitor will have to investigate who is actually insuring the building, if anyone.
6. The owners of flats are insuring their flats separately
This may occur because ‘it always has’. The buyer’s solicitor must check the insurance policies of the other flats in the building to ensure that in the event of large claim, the insurance cover is adequate. If the flat below you is damaged and is not going to be rebuilt then the buyer’s flat also will not be rebuilt as there will be nothing to build it on!
It is possible that the flats are freehold flats and this is the reason why they are each insuring their own. If this is the case there will be other issues that the solicitor will be concerned about.
The premium is a one off payment of a few hundred pounds but as it is a major purchase the buyer would be prudent to protect his/her investment. In the case of there being a mortgage, the lender may insist on the purchase of such a policy.
If you are concerned about the state of your property purchase's Buildings Insurance and require protection or peace of mind, request a callback from our specialists, or call the Fridaysmove team direct on 0330 660 0286.