Indemnity Insurance for First Time Buyers
First time buyers could be unfamiliar with the kinds of insurance policies available, and often required, when they enter the world of conveyancing.
A lesser-known policy, referred to as an 'Insolvency Act indemnity policy', sometimes known as 'deed of gift indemnity insurance', has been required by some lenders, and has recently caused a stir in the media.
So why do banks and conveyancing solicitors mention all kinds of different insurance when you're buying a property
Why Do Conveyancers Refer To Indemnity Insurance?
When conveyancers check the contract pack sent by the seller's solicitors, they sometimes discover that certain information is missing or there has been a breach in relation to requirements such as building regulations.
Rather than spend considerate time trying to find the missing information (which would substantially delay the transaction and be costly), there are some circumstances in which an insurance company would provide an indemnity policy to cover such risks.
What Is An Insolvency Act Indemnity Policy?
If, for example, your parents give you money towards a house deposit and they go bankrupt, there is a chance that this money could be clawed back by the person handling the bankruptcy. They could then potentially try and ‘unravel’ the purchase transaction.
This could leave a mortgage lender without security for its loan, therefore this insurance policy is intended to protect the bank if this situation arises.
What Other Insurance Might A First Time Buyer Need To Know About?
Some policies such as home insurance or a life policy may be required to protect you and your mortgage lender, so that the bank has peace of mind that the loan will be paid, even in the worst circumstances.
Home insurance should be taken out by buyers on exchange of contracts to protect them should the property be damaged e.g. by flood or fire. A life policy should be taken out by buyers to protect their families; as this would cover the cost of the mortgage in the event of the borrower's death.
Some of the most common kinds of indemnity insurance policies you may encounter will cover the following risks:
- Lack of 'Gas safe' or FENSA certificates – these are the most common policies and should be obtained if the seller can't provide compliant installation certificates for recent new boiler/window installations
- Lack of right of way – the historic title deeds may not have granted a specific right for the seller to use a particular path or roadway but the seller has been using it for a number of years for interruption
- Breach of covenants – many properties are subject to covenants and the seller may have breached a covenant e.g. built an extension a number of years ago without the consent of the original developer. In order to ensure that the buyer does not become liable for the breach of covenant, an insurance policy would protect the buyer against the potential costs of future enforcement by the developer
- Missing deeds – in many cases historic deeds cannot be found but as there is a risk that they may contain restrictions which may affect the buyer's enjoyment of the Property. Issues relating to common land or village greens
- Insurance for lack of planning permission/building regulations consent - if an extension or other structure has been built on the property, and the seller cannot prove to you that it has the appropriate planning permission or building regulations consent, you may be fined or forced to remove the structure. Insurance can cover the loss to you should this happen
In short, it depends. It's a point of negotiation. When insurance is needed because of a defect in the property, such as a missing deed, or defective title, the buyer will expect the seller to get and pay for the insurance policy.
However, this will not always be agreed by the seller, especially where the seller disagrees as to the defect. In some circumstances, such as where the buyer is under urgent pressure to exchange contracts, the buyer should expect to pay for his own insurance.
It's Not All Doom And Gloom!
As we have said, it is quite often the case that a buyer can request that the seller covers the cost of the insurance, and even go about arranging it for you, saving you the cost of instructing your own solicitor to do this.
Indemnity insurance isn’t suitable in all cases, for example, the seller may be unable to comply with the terms of the insurance policy or if the risk was created within the last 12 months (e.g. new windows recently installed), an insurer may not be willing to provide a policy.
You should discuss the pros and cons of insurance with your conveyancing solicitor
who will advise you on the best route to take.