What Is Indemnity Insurance When Buying a House

Indemnity insurance is a specific type of cover often used in property transactions to protect homebuyers and mortgage lenders against potential legal or financial issues that might arise after a purchase. It does not fix the issue but offers financial protection in case problems occur. In the UK housing market, indemnity insurance is a common tool used to manage risk when certain documentation is missing, planning permissions are absent, or legal uncertainties remain unresolved at the point of exchange.

This article explains what indemnity insurance is, when it is used, what it covers, how much it costs, who pays for it and whether it is essential. It is written for UK homebuyers, sellers and property professionals who need a clear and practical explanation of how indemnity insurance fits into the home buying process.

What Does Indemnity Insurance Cover?

Indemnity insurance is a one-off policy that protects the buyer or lender from specific legal or regulatory risks linked to the property being purchased. These risks usually involve missing paperwork, breaches of law, or uncertainties that cannot be quickly resolved without delaying the transaction. The policy pays out if the issue covered by the policy leads to financial loss, such as legal action, enforcement or reduced property value.

Common scenarios that prompt indemnity insurance include missing building regulation approval, lack of planning permission for an extension, historical boundary disputes, missing easements for rights of way, or the absence of a covenant consent. It can also cover restrictive covenant breaches, chancel repair liability and issues with defective leases or deeds.

The insurance does not rectify the issue or cover the cost of repair. Instead, it protects the buyer against the financial consequences of being challenged in the future. It is important to note that policies can be invalidated if the buyer contacts the local authority about the issue or makes changes that increase the risk.

Why Is Indemnity Insurance Used in Property Sales?

Indemnity insurance is usually suggested when a legal issue arises that could slow down or threaten a property transaction, but where resolving it through formal legal routes would be expensive or time consuming. Rather than delay the sale, the seller or buyer’s solicitor may recommend indemnity cover to allow the sale to proceed while protecting the buyer’s position.

For example, if a seller cannot produce a certificate for building work carried out several years ago, and obtaining retrospective approval would take weeks, a policy might be offered to protect against the risk of enforcement by the council. This approach is accepted by most mortgage lenders and is seen as a practical solution to avoid holding up the sale unnecessarily.

Is Indemnity Insurance Required by Law?

Indemnity insurance is not legally required, but it is often requested by solicitors or mortgage lenders as a condition of proceeding. The decision to use a policy is usually based on risk assessment, commercial judgment and lender criteria. Some lenders may insist on cover being in place before they approve the mortgage if they believe the issue could affect the value or security of the property.

While buyers are not legally obliged to accept a policy, refusing one may result in the transaction falling through or being delayed significantly. In most cases, the policy provides peace of mind without requiring any changes to the property or planning records.

How Much Does Indemnity Insurance Cost?

The cost of indemnity insurance depends on the nature of the risk, the value of the property and the specific issue being covered. Premiums can range from around £20 to over £500 for a single policy. Most policies are relatively inexpensive, particularly for minor risks, and only need to be paid once. There are no renewal fees or ongoing costs, and the cover lasts indefinitely for as long as you own the property.

For example, a policy to cover a missing FENSA certificate for windows may cost around £25, while cover for lack of planning permission on a rear extension could be £200 or more. Combined policies covering multiple risks may cost more, especially for high-value properties.

Who Pays for the Policy?

The cost of the indemnity policy is typically negotiated between the buyer and seller. In many cases, the seller agrees to pay for the policy to avoid delays or provide reassurance to the buyer. Sometimes the buyer pays, particularly if they have raised the concern or are keen to complete quickly. There is no fixed rule, and the matter is usually resolved through discussions between solicitors.

Lenders will often have their own requirements, and if they insist on cover being in place, the buyer may be more inclined to agree to the cost to avoid disrupting the mortgage offer.

What Are the Limitations of Indemnity Insurance?

While indemnity insurance can be very useful, it is not a perfect solution. It does not fix the underlying legal issue, and the problem may still affect resale value or cause difficulties with future development or planning applications. The policy usually excludes cover if the policyholder discloses the issue to third parties such as the local council. Making such contact can void the policy entirely.

Additionally, indemnity policies are very specific. They only cover the risks described in the policy wording. If a related issue arises that falls outside those terms, the policy will not pay out. It is important to read the policy carefully and ask your solicitor to explain what is covered.

Case Example

A buyer in Surrey was purchasing a detached home that had a rear extension built ten years ago. The seller could not locate the building control sign-off certificate. Rather than apply for a regularisation certificate, which could have delayed the sale by several weeks, the solicitor recommended a £180 indemnity policy to protect the buyer against the risk of enforcement. The seller paid for the policy, and the sale proceeded to completion without delay. The buyer’s mortgage lender accepted the policy as adequate protection.

Conclusion

Indemnity insurance is a practical and widely used tool in the UK property market that helps buyers and sellers manage risk without derailing a transaction. It is not compulsory, but it often provides a cost-effective way to deal with legal uncertainties such as missing permissions or documentation. While the policy does not resolve the issue itself, it offers financial cover against future challenges and is accepted by most mortgage lenders. Understanding what indemnity insurance does, when to use it and what it costs can help you make informed decisions and proceed with confidence when buying a property.