Legal indemnity insurance can offer important protection against various property title defects. Andrew Mellor and Sandra Noblet discuss the issues
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As land that is suitable for development or redevelopment remains scarce, developers and investors are increasingly prepared to consider property with serious title problems. One way of minimising any financial risk is to arrange legal indemnity insurance. This article examines the important points to bear in mind when determining whether insurance is appropriate, and, if it is, the practical considerations involved in arranging it.
What do legal indemnity policies cover?
The legal indemnity market has changed over the past five to 10 years. Insurance cover is now available for an increasingly wide variety of legal risks, and, as the market has matured, it has also become possible to tailor policies to suit the relevant circumstances and particular requirements.
There are two types of policy. First, a conventional policy will provide an indemnity for a specific problem, such as lost title deeds, a restrictive covenant, or the absence of a requisite easement. Second, a title insurance policy insures the whole title. Such policies guarantee a good and marketable title to a property, but they do not cover matters that are recorded in any registers that are open to public inspection (including registers maintained by HM Land Registry and HM Land Charges department). The policies may also include additional cover for particular problems, such as restrictive covenants. Title insurance policies are growing in popularity and are often used in volume transactions, such as remortgaging, where the insured has not carried out any title investigations.
What they provide
Legal indemnity policies provide financial cover, up to an agreed limit of liability, to the insured and its successors in title in respect of identified, but often unquantifiable, title risks connected with a particular property. It is important to understand exactly what such policies do and do not cover when considering whether they are appropriate in particular circumstances. They indemnify the insured against the following risks.
Financial losses: Financial loss sustained in the event of a third-party claimant establishing, or trying to establish, a legal right preventing the property from being used for the insured use. Here, financial loss means:
- the difference between the market value of the property with and without the relevant defect in title; or
- the cost of agreeing such rights as are necessary to remedy the defect – ie the cost of buying off, or settling with, the claimant.
Abortive costs: The abortive cost of work on the property for the insured use, in so far as the work becomes abortive because of a court order and the value of the property does not reflect this.
Alterations, demolition and reinstatement: The cost of altering, demolishing and reinstating the property, in so far as is necessary to comply with a court order.
Costs incurred with the insurer’s consent: All other costs, including legal costs, incurred with the insurer’s consent.
What further risks might an indemnity policy need to cover?
Legal indemnity policies do not usually cover any consequential or other economic losses that the insured might suffer as a result of any claim. This is because the policies are aimed primarily at developers and investors, rather than occupiers, and the indemnity is based upon the reduction in the market value of the property.
For instance, if an organisation is purchasing a site with a view to occupying it as a garage and car dealership, and the property is subject to restrictive covenants against using the property for the sale of petroleum-based products, it might be sensible to put a policy in place. However, this will need to include an extension for consequential and other economic losses. Without such an extension, in the worst-case scenario the organisation would be compensated for the reduction in land value, but not for the cost of relocating or for any interruption to the business. These costs could be as significant as the reduction in value, and would not be covered by the usual business-interruption insurance policies that most organisations carry.
Policies can also be extended to include loss of rent, liability for rent and rates, and the cost of alternative premises.
Do you really need an indemnity policy?
You will need to investigate all the facts and surrounding circumstances before deciding whether you need to incur the cost of insurance. You will also need to make a comprehensive set of relevant searches and inquiries and go on to consider the following issues.
- What is the nature of the relevant defect in title, and how old is it?
- Would the defect affect the way in which you intend to use the property? Would it be possible to reconfigure any proposed development to avoid the areas concerned?
For example, in Co-operative Retail Services Ltd v Tesco Stores Ltd [8] EGCS 5, the Court of Appeal held that a restrictive covenant against a piece of land being used for food retailing did not prevent it from being used for landscaping as part of a supermarket scheme.
- Has planning permission been obtained, and if so, were there any objections to the application? (See below.)
- Who owns and occupies the surrounding properties and how are those properties used?
- Are there any third parties who know, or might know, that they could have rights over the property concerned?
- Are restrictive covenants causing the problem? If so, would it be possible to ask the Lands Tribunal to modify or discharge them, and what legal or other costs would you incur if you were to do so? (See Estates Gazette 17 February 2001, p151).
- How much would insurance cost?
Confidentiality
Investigations need to be carried out sensitively, so as not to alert any potential third-party claimants. If third parties do discover potential rights over the property, you may not be able to buy the insurance cover that you need. This could kill a potential development scheme, or substantially increase development costs, because you could be forced into negotiating with those third parties.
Other factors to bear in mind
If incumbrances are relatively recent, or if the beneficiary is clearly identifiable and has a presence in the surrounding area, it may be that insurance will not be available. You will need to establish the position as soon as possible, and consider the wishes and requirements of the other parties, or potential parties, to the transaction. They may have different views. A seller who has known his property for many years may not believe that it is necessary to incur the cost of the premium, but the other parties to the transaction may refuse to take the risk unless they are protected by indemnity insurance.
Correct timing and structuring of the transaction
Timing is important, especially if you plan to put the property to a different use. The grant of planning permission is usually the key milestone. Why? Planning authorities should disregard title-based objections when considering applications, but insurers take the view that the planning process will reveal whether there are any potential third-party claimants who may seek to enforce rights.
If you require insurance on a pre-planning basis, you will need to put the policy in place before you make your planning application and before the public consultation takes place. However, this will cost more than arranging a legal indemnity policy on a post-planning basis.
It is not possible to put an indemnity policy in place on a conditional basis, but you could make the transaction conditional upon obtaining an indemnity policy, while placing all parties under an obligation to maintain confidentiality. If you are dealing with a transaction that is conditional upon planning, consider making the transaction conditional, in turn, upon obtaining both planning permission and indemnity insurance, because the premium will, of course, be less on a post-planning basis.
Cost of obtaining indemnity cover
Insurers charge a single premium for legal indemnity insurance, which must be paid when the policy is put in place. The policy will enure for the benefit of successors in title to the land, and, in effect, becomes a title deed.
Because the limit of liability does not increase, the benefit of the policy will, after a time, be eroded by inflation. However, the risks will also reduce as time passes and a third-party claimant does not come forward. It is also possible to inflation-protect policies, and, depending upon the circumstances at the time, to increase the limit of indemnity by way of a supplemental premium.
While it is not possible to offer any meaningful guidance as to costs, given the tailored nature of indemnity policies, the premium costs are linked to the limit of indemnity. This is usually the developed value of the property, on the basis that the property is not subject to the incumbrances against which you are insuring. However, the costs in relation to less tailored restrictive covenant indemnity policies would usually be in the region of 0.1% on a post-planning basis, but the insurers will treat each risk on its own merits.
Conclusion
Indemnity insurance can provide an imaginative solution to legal problems that might otherwise stymie developments.
Andrew Mellor is an associate with Wragge & Co and Sandra Noblet is a legal indemnity account executive with WPS Westinsure
