Indemnity is a rather broad term to understand. In its widest sense, it means to compensate for a loss or liability. It is typically a contractual agreement between two parties, agreeing upon compensation for damages and losses, as well as identifying any exclusions.
In terms of insurance policies, an indemnity is an arrangement between an individual or business and an insurance company. Indemnity insurance covers a policyholder against unexpected damages (and potential legal costs). In these instances, the insurer is the indemnifier who would reimburse the person taking the insurance, or the indemnitees, if the worst happens.
Some indemnities can absolve the indemnified party or the other party of liability. For example, indemnity clauses could absolve service providers of liability if their goods are damaged by a third party. An example of this could be a gym not being liable to compensate you if you can't access the gym for reasons outside the gym's control.
Indemnification in English Law has its basis in the common law. EU law nor Brexit has affected the use of indemnities in the country.
Signing an indemnity clause
Indemnity usually comes into existence when you enter a legal contract, such as with an insurer. These are called indemnity clauses, and they identify the indemnifier and the indemnitees. In the case of insurance, they outline the involved parties and their responsibilities. They also set out steps for breach of contract.
It's worth noting that indemnity clauses don't always need to involve financial compensation. They can be used only for the limitation of liability. They can deal with things like intellectual property rights or even data protection.
Is there a difference between an indemnity, warranty and a guarantee?
Indemnity sounds quite a lot like a guarantee. While they are similar, there is a critical difference between the two. Indemnity always creates a primary obligation. In practice, this means the indemnity clause offers compensation in the event of a loss or future loss. A guarantee provides you with either compensation or fulfilment of a contract with the guarantor taking the responsibility if the party member is unable to meet the obligations. In short, indemnity and guarantee offer different layers of protection.
Indemnities are also different to warranties. They are a form of statement and only give rise to claims in damages if the breach of contract can be shown. Whilst indemnities can often protect the buyer (and sometimes the seller), warranties tend to put the onus on the claimant, i.e. the buyer. They have to show the consequential loss and breach of contract. With warranties, things like the remoteness test come into play. However, in all cases, various omissions and exclusions may apply.
Different types of indemnity insurance
Indemnities relate to many other types of insurances. For example, home insurance has indemnities offering you protection. If you were to experience a fire in your home, then your home insurance would indemnify you from the cost of replacing goods or repairing the damage. Indemnity is part of the insurance contract.
But there are many other more common indemnity uses in the world of insurance. Below are examples of indemnity for particular scenarios for individuals and businesses.
Personal indemnity insurance
One of the more common types of personal indemnity insurance relates to the sale of a property. We will cover this in more detail in a moment, but this type of cover can be a handy safety net. For example, say you were holding a party in your garden, and someone was injured due to negligence. Personal injury insurance would indemnify you from any compensation or legal costs.
Professional indemnity insurance
Professional indemnity insurance is a massive market in the UK, offering cover for those found to be negligent or causing direct losses for their clients in a business capacity. Professional indemnity insurance is different to business indemnity insurance, as it covers the actions of the individual, i.e. the indemnitor. This type of insurance is also crucial for medical professionals where negligence claims and costs can be significant.
Business indemnity insurance
As the term suggests, business indemnity insurance covers the cost of negligence claims and compensation against a business. This type of insurance can prove extremely valuable for large and relatively small companies, where a sizeable compensation claim could bankrupt them. In addition, they can be part of share purchase agreements or other contractual provisions. While some see them as a "waste of money", the value of indemnity insurance will quickly become apparent when you need to make a claim!
Property indemnity insurance
One of the most common types of indemnity cover refers to property indemnity insurance. This is a type of contractual indemnity protection for different parties during the sale and purchase of a property.
The popularity of this type of indemnity becomes apparent when you consider the cost of buying and selling property. Even though the annual growth in UK house prices slowed slightly in July, the average cost of a home in the UK now stands at £244,229. Consequently, the purchase of a home will likely be the most significant investment most people make in their lifetime. Therefore, it stands to reason that buyers and mortgage providers will leave no stone unturned to arrange cover for unexpected and potentially costly issues further down the line. Many potential problems and claims can arise during the process, and contracting parties want to ensure they're not burdened with damages claims.
What does indemnity insurance cover?
An indemnity agreement when buying property can help cover a lot of issues. The majority of property-related indemnity insurance will be taken out as a consequence of potential problems already identified. These include topics including those below.
Planning permission indemnity insurance
Many of us automatically assume that extensions and structural changes to a property have been carried out after receiving planning permission. While this may be the case, you always need documentation from the seller to guarantee it. To remove any doubt, you should get a contractual obligation for the seller to provide this information. Therefore, indemnity insurance can be arranged, covering the cost of potential losses or issues further down the line if it turns out proper planning permissions weren't in place.
For example, if the extension to a property you acquired did not receive planning permission, this illegal act could cause serious issues. Local authorities may be able to insist the property be returned to its former structure. Even if retrospective planning permission was given, this could attract high costs concerning legal and architectural advice.
While building regulations can change regularly, builders should be aware of the rules and ensure their work takes these into account. On the other hand, if individuals have undertaken work within their home that does not abide by building regulations, there could be severe consequences. Indemnity insurance cover can fund any remedial work required or any action taken by the local authorities.
Keeping track of all building work in homes across the UK is challenging to say the least. Tracking the issue of restrictive covenants can prove even more difficult. It may only be after you have purchased a home that you learn about breaches of restrictive covenants.
Restrictive covenants are provisions within the deeds limiting the use of the property in some way. This type of issue often refers to unauthorised extensions, which can be costly to rectify. If forced to knock down an extension, there's the cost of the work to consider and a reduction in your home's value. But restrictive covenants could also put limitations on things like keeping livestock or providing neighbours access to parts of the property (such as a well).
Access issues are a common reason to include an indemnity clause in a contract. Most neighbours work hand-in-hand for matters like access, even if this infringes slightly on an individual's land. The problem is that your future neighbours may not be as accommodating, and problems can arise regarding access to drains or the use of a driveway, for example. This type of scenario could incur steep legal costs and even impact the value of a home. Unfortunately, many people fail to look ahead to potential issues with access, welcoming and appreciative of their current neighbours.
Deeds and Land Registry documentation
While most homeowners will ensure their deeds and land registry documents are held in a safe place, this isn't always the case. In addition, locating or providing replacement documents can prove time-consuming and relatively expensive. Yet, these documents are critical, and while there are many ways they can be stored securely, not everybody seems to appreciate their value.
Legal claim on your land
You must retain necessary documentation showing boundaries to your property, historical changes and your rights of access. For example, if someone were to make a legal claim on your land, you would need to provide the relevant documentation to support your position. Missing documentation can lead to expensive legal costs and other expenses. Consequently, many solicitors will recommend taking out indemnity insurance to give their clients peace of mind.
Who arranges indemnity insurance on a property?
This is an interesting subject and one which is considered on a case-by-case basis. Traditionally, as the buyer is undertaking a significant investment to acquire a home, they tend to be more proactive concerning indemnity insurance cover. However, on the flip side of the coin, you may find that a seller is desperate to complete and therefore purchase indemnity insurance to encourage a buyer to close the deal.
There will also be occasions where the buyer may persuade the seller to cover part of any indemnity insurance costs. After all, both parties have a vested interest in completing the sale as soon as possible.
Keep in mind that indemnity insurance covers the person or people buying the property. But it also protects their successors. If you are taking out a mortgage on the property, the indemnity contract would also include your lender.
What happens to the indemnity insurance if I sell the property?
When we acquire traditional insurance policies, they are specific to an individual. It can be very different when it comes to indemnity insurance, especially where property is involved. Many people will not be aware, but indemnity insurance is tied to the property, not the owners. Consequently, if you have taken out indemnity insurance in the past, then this will transfer to buyers in the future when they take ownership of the property.
Note that the property value might change, and this could influence the premiums. If your property value increases, then additional coverage may be needed. But there is usually no fee for transferring the indemnity cover to the new owner.
How long does indemnity insurance last?
Typically, indemnity insurance on a property will last indefinitely. However, it is essential to be aware of the fine print of any indemnity insurance when acquiring a property (or any other scenario). For example, there may be some small print in the policy that triggers an additional premium if an asset reaches a specific value. Unless this premium is paid, you may find that you are no longer indemnified against financial losses.
In an interesting and potentially costly quirk, some indemnity insurance policies will be invalidated if you reveal potential issues to third parties. The best example of this would be indemnity insurance purchased as a consequence of potential planning permission issues. If you were aware of potential problems upon purchase and applied for retrospective planning permission, this would alert third parties in the shape of the local authorities. Consequently, you would likely find that your cover lapses, and you may well be exposed to costs associated with any subsequent legal action.
How much does indemnity insurance cost?
This question is akin to "how long is a piece of string?" The first thing to remember is that indemnity insurance incurs a one-off payment with no monthly premiums. So, depending upon the purpose of insurance, this one-off premium could be less than £100 or up to several hundred pounds and beyond.
When looking at indemnity insurance, it is crucial that you take professional financial advice. This will ensure that you get the best deal possible and the most relevant cover for your situation. Cutting corners and cutting costs may save you a few pounds in the short term, but it can prove extremely costly in the long term.
Do I need property indemnity insurance?
Many insurance policies are often seen as an "expense" until you need them, when they can quickly become the best investment ever. There are two main issues to consider when looking at property indemnity insurance and whether it is worth it.
Protecting your investment
As we touched on above, for the vast majority of people, purchasing their home will be their largest-ever investment. Quite why you would not wish to protect and cover this investment from unexpected issues in the future is difficult to understand. We have seen some property-related problems lead to a significant reduction in the family home's value. Can you afford to take the risk?
If you put yourself in the shoes of your mortgage provider, they will prefer (or insist!) on the relevant cover being in place. The simplest example is a lack of planning permission leading to an extension being knocked down. This would have a significant impact on the value of your home, with potential repercussions for your mortgage.
Let us assume that your property was worth £200,000 with an outstanding mortgage of £160,000. This equates to a mortgage loan to value ratio of 80%. In this scenario, there is a significant gap between your outstanding mortgage and the value of your property. However, if an extension was built without planning permission and the local authorities insisted it was knocked down, this would impact the value of your home.
In this scenario, let's assume the value fell to £150,000. With a £160,000 mortgage outstanding, the loan to value ratio is now 107%. This means that if you were to default on your mortgage, the property's value would not cover your liability. This is why mortgage providers are highly proactive when it comes to indemnity insurance!
The real value of indemnity insurance
Like any insurance, many people view indemnity insurance premiums as just another added expense until they need them! Whether looking at personal, professional, or business indemnity insurance, this subject requires due consideration. As they are a means of providing cover for issues that may or may not ever happen, you never know when you may need them. However, the value of this safety net should never be underestimated. Any type of mitigation process could end up costing you a lot of money, especially when it comes to property. By having strong indemnity insurance, you can protect yourself and your property. Before you buy indemnity, do talk to legal advice to ensure you get the best possible cover.