If you’re looking to sell your home, you may have come across something called “indemnity insurance.” But what exactly is it? And how does it help home sellers?
Indemnity insurance protects the seller against legal action by the buyer should the buyer discover a defect in the property that the seller did not disclose following the completion of the property transaction.
In the UK, it is the responsibility of the buyer to make all the necessary checks and inquiries before purchasing a property. Property conveyancers and solicitors, therefore, advise buyers to hire a surveyor to check that there are no issues with the property which could affect its value.
In the UK, the seller is not obliged to come forward and talk about all the defects and problems with their property. However, if the buyer asks about a specific aspect of the home, such as the state of the foundations or roof, then the seller must respond truthfully and accurately.
Usually, sellers complete a property information form. The property information form is a document that the buyer uses to ask the seller about whether they know of any issues with the property (or the surrounding area). Sellers must complete the form both honestly and accurately.
A seller, however, may not know about a defect that later comes to light or may be perceived by the buyer as having lied. The buyer may then initiate legal action, claiming that the seller misrepresented their property to try to sell it for a higher price.
Why should a seller take this when selling their home?
The legal costs and compensation following a successful claim by the buyer can be enormous. The seller may have to pay back some of the money they received from the buyer during the initial transaction to cover the cost of the defect. A court will decide how much compensation the buyer is owed, which will depend on the severity of the fault and the impact that it will have on the value of the property.
The reason sellers take out indemnity insurance is to protect against legal costs and compensation payments, should the buyer successfully claim that the seller misrepresented the property during the sale.
What Does This Cover for the seller?
Sellers can be liable for claims for all kinds of reasons, many of which are not immediately apparent.
Let’s say, for instance, that the property has had building work which requires planning permission, but the buyer later finds out later that there is no evidence of planning consent ever being given. The buyer, therefore, is then at risk. The planning authorities could order the demolition of certain sections of the property and impose fines, costing them money and reducing the value of the property.
Other reasons for claims include situations where the seller breached a restrictive covenant on the property, incomplete building regulation paperwork, and “adverse possessions” where the Land Registry isn’t convinced that the seller had legal ownership of the property.
Selling a property is a complicated process, and so many people avoid possible legal cases against them by taking out indemnity insurance, just in case.