Building Blocks - Title Indemnity Insurance

Aidan Welton takes a look at title indemnity insurance, focusing on what to consider when obtaining indemnity insurance and the types of policies available on the market.

What is title indemnity insurance?

Title indemnity insurance is a type of financial product offered by specialist insurers which seeks to provide a financial remedy for risks relating to the ownership of real property. These risks will usually have been identified as part of a pre-acquisition due diligence investigation, although it is possible to take out cover for unknown risks where no due diligence has been carried out, for example if there is not enough time to carry out searches.

It is important to understand that indemnity insurance is not a one size fits all solution and policies need to be carefully sourced and tailored to the needs of the transaction. Policies do not necessarily resolve, remove or remedy the underlying risk identified; the policy only provides a limited financial remedy in the event of a claim being made. For this reason, indemnity insurance should be approached with caution and in many cases a policy should only be obtained as a last resort where all other avenues have been exhausted.

What are the key considerations when seeking an indemnity insurance policy?

• Insured. This is the named party who benefits from the insurance and should be the party with the interest in the land. Typically, the policy will extend the “Insured” to cover successors in title, those deriving title from the named party (such as a subtenant) and any mortgagee. If the property interest is leasehold, it is common for the freeholder to also benefit from the policy.
   
• Property. Care should be taken to ensure that the full extent of the relevant property is covered by the policy. This will need to be clear (by reference to a plan where appropriate) so that anyone looking at the policy in the future can clearly ascertain the extent of the cover.
   
• Insured use. This is often the same as the current use but will need to be flexible enough for the insured’s intended use of the land. If the use changes the policy may be invalidated. This is a particularly important point in a development context.
   
• Limit of indemnity. This is the maximum amount which can be claimed under the policy. If there are multiple risks covered under one policy, it is crucial to ensure each defect has sufficient cover. The amount of cover required will always be property, defect and client specific. Special care should be taken to ensure the limit is suitable to the specific circumstances. Some policies will also include automatic annual uplifts linked to RPI (or another index), perhaps subject to a maximum cap.
   
• Defect. The defect should be clearly described in appropriate detail. It may be appropriate to separate defects out into separate policies.

What loss will be covered?

The type of loss covered will depend at least in part on what type of defect is being insured against, but broadly policies usually cover the legal costs in defending a claim, the costs of settling that claim (either a settlement agreed between the parties or a court ordered settlement) and potentially compensation linked to the loss in market value of the property caused by the defect.

Market value is not always a helpful barometer of loss. For example, if the insured’s interest in a property is a market rent lease, there may not be any capital market value in their interest. In these circumstances the insured would be better off with compensation linked to the losses caused by the interruption in their business and any relocation costs.

Policies will also seek to exclude certain types of loss. Each insurer and policy will have its own exclusions and limitations which need to be carefully considered to ensure they are appropriate to the insured’s requirements and do not negate the benefit of taking out the policy.

What defects can typically be covered?

The following are some of the defects for which cover is typically available on the insurance market:

• Restrictive covenants. If during the due diligence process restrictive covenants are identified which are either being breached by the current user or will be breached by the insured’s intended use of the land, this type of cover may be available. The restrictive covenants in question might include user restrictions or obligations to obtain third party consents or approvals before carrying out works or changing use.
   
• Easements. There are a variety of defects here that could be covered: lack of necessary rights of way, breach of easement (including intensification of use) or adverse rights affecting the property. One head of cover that is often excluded with this type of policy is any cost contribution towards the repair or maintenance of the burdened land.
   
• Mines and minerals. This is generally more of an issue when land is being developed and is similar in some sense to an adverse rights policy. The level of information one can obtain about the extent of the mines and minerals that have been excepted and reserved, to what depth, with what rights of working and to whom they benefit varies hugely and the Land Registry often has incomplete records.
   
• Chancel. This is one of the most common types of policy. Where a Chancel Search reveals the property is within a historical boundary which continues to have a potential chancel repair liability, a Chancel Policy can often provide cheap and swift comfort. The underlying onerous obligation with chancel repair liability is simply the risk of being called on to make a financial contribution and a policy can offset that risk.
   
• Missing documents. Sometimes the Land Registry will know that a document affects a title and contained adverse rights or covenants but does not have a copy, leaving the owner with no details of the potential encumbrances. In such cases the property could be subject to adverse rights or covenants which are enforceable, but these will not be known. Indemnity insurance can be taken out in respect of such a risk.
   
• Adverse possession. If a seller is not able to deduce title to part of the property being sold, but it is in adverse possession of that land, then depending on the precise facts and circumstances, cover may be available. Such a policy is unlikely to support an application being made to the Land Registry for possessory title (although separate insurance may be available where possessory title has already been established) but it should assist in covering a legal defence, settlement payment or loss of market value in the event that the paper owner brings a claim.

The above is by no means a comprehensive summary of all types of title indemnity insurance. If you have any questions on the above or require advice in this area, please contact our real estate team.