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I have had a question from a visitor all about indemnity insurance being required for a property and the visitor wanted to understand more about it, they offered a bit more information about their particular situation.

I visited a property that has an extension but the current owner did not get planning permission which would have been required. The agents say it was put up 26 years ago and indemnity insurance would prevent issues. Will it?

What is Indemnity Insurance?

Essentially it is a way to protect against the future risk of a legal defect relating to the property you are intending to purchase. In the situation described above the indemnity would offer protection should the local authority attempting to take enforcement action against you at any time after purchase as a result of the extension not having the correct planning permission.

Obtaining insurance of this type is relatively easy, however, it will only be available where the risk is considered low of a claim ever being made. But, in the event of a claim, the loss incurred is likely to be high. In the scenario related to the question above the loss could be that the local authority may insist that the extension is removed completely.

What does it cost and who pays?

Generally, the need for indemnity insurance arises from a property being sold from one to another and it is during that time the valuer or solicitor identify a need for it. In the majority of instances, the vendor will be asked to pay the cost of the policy. Usually, no more than a few hundred pounds, it’s a one-off cost.

The vendor is under no obligation to pay although it is in their interest to ensure the sale goes through smoothly. If they refuse then you as the purchaser may need to pay it or you agree to split the cost some way.

What indemnity insurance pays in the event of a claim

All indemnity policies have a value and will pay out up to that value depending on the loss incurred. It will only ever pay out an amount of money, the insurer will not responsible for rectifying the defect it covers.

So if a local authority came along and insisted that the extension which did not have planning permission had to come down, then the insurer would calculate the cost of the loss which will include legal costs of dealing with the matter including costs to remove the extension. In some cases, it will also cover the cost of rebuilding it correctly.

The amount paid from the claim will also include the loss in value the property suffers as a result of no longer having the extension. That is where the policy does not cover rebuilding.

What it will not cover?

Whilst indemnity insurance is an option you should also consider whether the defect itself is really one you want to live with after purchasing the property or whether it is considered an essential repair or replacement that must be carried out.

For example, I have seen extensions built to a very poor standard without planning permission and the reality is that it needs to come down and be rebuilt regardless. Indemnity insurance covers a legal defect only, It will not cover repairs or rebuilding due to its poor workmanship.

So if you do need to do costly work that needs to be paid for by you then the price you pay for the property should reflect that.

Can you invalidate Indemnity Insurance?

Absolutely yes and you need to be careful not to do so. I have seen homeowners invalid their policies inadvertently.

It is important to remember that indemnity insurance is providing protection for some type of defect that may or may not is known at the time of purchase. But in the case of a known extension without planning permission, it is assumed that the local authority planning department does not know about it or at least there is no evidence to suggest they know about it.

Whilst you may be aware of the lack of planning permission you do not whether on inspection by the local authority they may in fact pass it and issue retrospective planning permission or deny it and request it be removed.

This is key, you are obtaining insurance to protect against the unknown. If there is information available that can show with certainty there is a specific issue, you are unlikely to get cover or have a claim refused in the future.

You cannot at any point attempt to contact the planning department and try to get retrospective planning permission. By doing so you are drawing their attention to it. If they refuse planning and tell you to remove the extension, the indemnity insurance will be invalidated as you told the local authority about the issue.

Another one to be careful of is a situation I have seen several times in the past. That is where a homeowner decides to do other work to the property which requires planning permission. As a result of the planning department coming to the property to inspect that work, they notice the extension and start enforcement action due to it not having permission to be there. So simply having the planning department visit the property to look at the new work you are doing, will invalidate your policy.

The point here is that indemnity insurance is not necessarily the right option in all cases. It is not a guarantee you will never have an issue, neither is it a guarantee you will never lose money or value in your home by having it.