Indemnity Insurance for Title Defects

It’s quite common for properties to have title defects and many property owners would not realise there is a problem until they come to sell or re-finance. When a buyer or lender’s solicitor is carrying out their due diligence, they may uncover a title defect which could impact on the property’s value or its future marketability. Sometimes these defects can be put right however it’s also often agreed to deal with the defect by obtaining indemnity insurance.

What are title defects?

The term ‘title defect’ is very broad but is generally taken to mean that either there is a potential for a third party to make an adverse claim against the property, or that there is something missing from the property’s title which should be there. Examples of title defects are:

• the property needs a right of way over a private road to access it but there is no right of way on the title
• there is a restrictive covenant on the property which prevents it being used for a particular purpose, and this might be breached
• the property is not owned ‘outright’ -e.g. it was acquired through adverse possession
• title deeds are missing or lost
• planning permission or building regulations approval was not obtained for work that has been carried out when it should have been.

This is not an exhaustive list, there are many other types of title defects that could affect a property with differing levels of risk depending on the nature and extent of the problem.

Why could indemnity insurance be better than fixing the problem?

Often property transactions are time-critical. An indemnity policy can be a very quick solution to an identified title defect which allows a sale or re-finance to proceed without delay.  Indemnity insurance is generally available at relatively low premiums and could be cheaper than the time spent by lawyers in investigating and trying to correct the problem.

What are the drawbacks of indemnity insurance?

It’s important to be aware that indemnity insurance does not fix the defect, it insures against any loss which might arise in the future due to the defect.  Many people are reassured by knowing they have that financial compensation in place if there was ever an issue- however some would prefer the defect to be remedied rather than relying on insurance.

Indemnity insurance policies will always have a limit of the amount of loss they will cover- this is usually set at the value of the property. They are also often subject to conditions and there is a risk a policy could be invalidated if these are not complied with.

Sometimes a title defect cannot be covered by insurance if it is considered too great a risk by the indemnity insurer.

How much does indemnity insurance cost?

The cost of indemnity insurance varies depending on the nature of the defect, the value of the property and the potential risk (as assessed by the insurers).  There are many indemnity insurers in the market however and they so generally premiums are competitive.  In the vast majority of cases, the premium is a one-off premium for a policy that will last for years and that can be passed on to future owners.

What will I need to do?

If an indemnity policy could be a good solution for a transaction, we would contact indemnity insurers to explain the problem and obtain quotes. The insurer may need some specific questions answered by the property owner or copies of supporting documents to help them decide if they can offer cover. Sometimes the owner is required to make a statutory declaration to confirm the facts- if so then we can draft the declaration.

If you need any advice on indemnity insurance or title defects, please contact a member of our commercial property law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.