The method we often see in residential property transactions is the application of an indemnity policy topaper over the cracks of property and title defects. Whether that be – missing building regulations certificates, lack of easement or breach of planning – an indemnity policy can be a valuable tool to enable clients to continue to purchase a property with added financial protection of a policy in the event of a claim, especially where a lender is involved.
Our role as legal advisors is to scrutinise the title to highlight such risks which could be inherited by buyers and consider the best interests of our client.
An example of a scenario encountered is where, its apparent that a parcel of land was omitted from original registration. Land, which is critical to the enjoyment of the property, such as part of the driveway.
At first glance, an indemnity policy may appear to offer a convenient and cost-effective solution. However, for discerning clients, reliance on indemnity insurance in such circumstances is often inappropriate.
Limitations of indemnity insurance
Indemnity policies are designed to compensate for financial loss arising from title defects, not to resolve the underlying issue.
In the context of our above example, several limitations arise:
1. The policy does not fix the defect
An indemnity policy does not rectify ownership or grant a right of way.
While the policy may address financial loss in the event of a claim, it leaves the client exposed to ongoing uncertainty.
2. Indemnity policies are restrictive
An insurer is only ever providing financial cover in the event of a claim; the role of the client is not to highlight the defect to any third party.
Restrictions within the policy can include:
- Prohibitions on approaching third parties (such as the true legal owner)
- Limitations on disclosure of the defect
- Constraints on development or alteration that could trigger a claim
Property purchases are often an investment for clients, so its appropriate to consider what their long-term intention is. Should the client seek enhancement, redevelopment or refinancing of the property, restrictions included in indemnity policies may not be commercially viable.
3. Impact on future saleability
Its not all about the purchase. Clients value advice that shows we are truly acting in their best interest, not just to push the transaction through. A consideration needs to be made about how this should impact the client when they come to sell.
A known discrepancy, even if insured, may:
- Deter prospective purchasers
- Lead to price renegotiation
- Cause delays or mortgage lender concerns
- Future cost to client to fix the issue
An indemnity policy can introduce friction in future transactions, particularly where the land in question is integral to access or parking.
4. Lender and valuation considerations
Lenders and valuers often adopt a cautious stance.
A defect affecting access or enjoyment of the property, even if insured, may:
- Affect valuation assumptions
- Lead to additional due diligence requirements
- In some cases, result in lending reluctance
Key takeaways for property buyers
Indemnity insurance has its place within conveyancing practice and can be a pragmatic solution in certain low-risk scenarios. However, it is not always the optimal approach.
The goal should not simply be to insure over the problem, its to consider the intention of the client and how well it would suit their best interests for both their short and long-term goals.
With respect to our missing land example, a transfer of part was the right way forward. A swift approach was made the landowner to deal with the land transfer, which will resolve the defect entirely. The client can proceed with the purchase with the knowledge that they do not need to deal with the hassle of a potential claim or headache when they come to sell.
Not all title rectifications need to be protracted; you just need the right advice and the people on board to make it happen.
