Emma Emerson, insurance executive at Scrutton Bland with special expertise in providing cover for land and property transactions, looks at indemnity insurance cover for commercial property transactions.
In 2009 a couple near Stratford upon Avon made the national news when they were forced to sell their family farmhouse in order to pay for £230,000 of repairs at their local church, thanks to the enforcement by the local diocese of an ancient property law dating back to Henry VIII. They were held responsible for a ‘chancel repair liability’ clause which arose when the church gave the farm 1.1 hectares of land, in return for the property owners being named as lay rectors and being held responsible for some of the church repairs. The couple spent £250,000 in legal bills to fight what they had thought was “a dead law” but in fact the regulation still applies to approximately 5,200 pre-reformation churches in England and Wales. It is a salutary lesson in the importance of being aware in advance of possible problems relating to buildings, titles and deeds.
Whilst domestic homeowners are encouraged to take out an indemnity insurance policy to cover themselves whilst buying or selling a home, legal indemnity insurance is obviously a key aspect of commercial property transactions to protect against local authority action, or legal problems in the future.
Risks may be uncovered during the due diligence process, and typical reasons for taking out indemnity insurance include
- Cover for missing deeds, leases and other documents relating to the title of the property
- Cover for problems arising from work having been carried out in the past without proper planning consent, such as planning permission issues or missing building regulation certificates, and professional installation certificates for fire prevention equipment or windows
- Cover for problems arising from interpretation of documents, for example where old plans have been digitised and are now unclear; similarly, where legal papers have been worded in a vague or ambiguous way
- Cover for breach of restrictive covenant, such as restrictions on access to a property, or types of residential developments
- Cover for losses in a jurisdiction where local practices and registration processes are unknown to the purchaser
Being able to cover these risks with insurance can in many cases unlock a deal which would otherwise stall.
Depending on the location and circumstances of the property, there may be policies which are relevant to the developer, buyer or lender, and your insurance broker should be able to assess the risks relating to you and your situation and advise accordingly – often in conjunction with your solicitor. A competent property insurance broker should have detailed knowledge of this area of the industry and point out certain risks which may be relevant to you, as well as changes in business law, and of course if any claims do arise in the future, they will be able to help you manage the claims process.
It is important to remember that legal indemnity insurance is taken out to give protection to a buyer (and a lender) where there is a defect in the title, which has been uncovered through due diligence and which cannot be resolved. It does not remedy the defect, but it does offer financial compensation should a claim be brought against the property owner in the future. It is a one-off payment for a policy that then lasts forever. However if an event occurs that triggers a claim against an indemnity policy, it is very important not to disclose the existence of the indemnity policy to the claimant’s legal advisers to avoid possible prejudice to the insurers. Most legal indemnity policies contain a non-disclosure condition, and if that is breached it may mean that cover is declined.
Legal indemnity insurance used to be the exception and not the rule in commercial development transactions. However, over the past twenty years or so it has become a critical tool enabling many developers to obtain funding in order to proceed with their project.