Posted on June 17, 2019
Chloe Mulroy shares a short guide to the dos and don’ts of legal indemnity insurance, in an article recently published in
The New Law Journal.
Law firm DAC Beachcroft estimates that nearly 20% of property transactions, both commercial and residential, are completed with a legal indemnity policy. For new solicitors, the intricacies of cover can often get lost in translation. As a former underwriter, I fielded calls daily from solicitors, asking what they needed to know about legal indemnity policies. I have summarised these calls and concerns below.
1. What legal indemnity insurance is… and what it isn’t
Legal indemnity insurance is used in a property conveyancing transaction where a defect exists (such as lack of planning permission, issues with right of way, absent landlord etc.) that cannot be resolved easily or at all in some cases. The risk is characterised by the potential to cause a loss should the defect be challenged. With this type of policy, you only need pay a single premium, and the cover will last in perpetuity. Legal indemnity insurance is not a building insurance policy, rather, it provides protection against potential risks which may arise during conveyancing.
It can be difficult to ascertain what information needs to be sent to the underwriter to determine levels of cover. What you send is critical in helping the underwriter create the policy. What should you be aware of when considering a legal indemnity policy for your clients?
2. Make sure that all the terms have been correctly identified
Terminology is critical when writing insurance policies, as wording is extremely precise. Confusing terms, or simply not choosing the correct term, could result in gaps in cover. A common example that I saw while writing many policies was confusion surrounding the intricacies of adverse possession versus rights of way/easements. There is a small but critical difference between these two: adverse possession allows a third-party use of land as part of the property, while right of way allows a third party to use land as an access.
Adverse possession may cover ownership of specific parts of a property or the entire property, while right of way would only apply to those parts of the property that are used as accessways. An adverse possession issue that has been incorrectly classed as an issue of right of way could cause significant damage down the line should the homeowner make a claim that isn’t covered.
3. Keep enquiries precise
Many solicitors will send their underwriters over fifty pages of documentation, most of which is unnecessary for the risk being covered. As an underwriter, this is counterproductive, because it means that an insurance professional will need to sift through all the irrelevant information to find the relevant information. Sending too much information could result in a delay in the policy, or a policy that is incorrect for the property, and therefore provides inadequate cover. In most cases, you’ll simply need to send along the title, length of use of the area insurance is required for, and price of the property along with plans to the underwriter. An underwriter will always ask you for more information.
Always check the title to the property and local searches
Checking the title to the property and local searches (as well as sending the title to the underwriter) is a crucial step. One case I remember vividly included a property seller that had built an extension on their property without obtaining the consent from the beneficiary of a restrictive covenant noted on the title. The solicitor did not request to see the title of the property before the exchange. After the sale completed, the beneficiary of the covenant discovered that the extension had been erected without their consent, and took legal action. In this case, the solicitors were liable for negligence, as they had not checked the title to the property, but this situation could have resulted in cost implications for the client.
Documents may not exist
In some cases, the title to the property or other documents relating to the property are not available due to the age of the documents or the fact they have been mislaid by a previous owner or solicitor. If the documents are not available, the contents of these are unknown but they could contain covenants, rights or easements which could affect the property. In instances like this, a legal indemnity policy will protect against any unknown covenant or right being enforced. It is exactly this type of situation in which a legal indemnity policy would be useful, as this represents a situation of plausible doubt.
Manage your client’s expectations
A legal indemnity policy does not always ensure that potential problems are fixed. Should a claim be made under a policy, dependent on the insurer, claims are likely to be resolved with financial compensation for the loss. For example, the insurer would pay the owner of the land which is adversely possessed so the homeowner can keep this as part of their garden, rather than having the issue corrected, for example, moving the boundary of a property back to where the legal boundary of the property should be. Advise your clients to be very wary of litigation. Although legal expenses are generally covered, the amounts paid and how they are broken down vary between each insurer. Issues with titles to residential property are very common, and solicitors dealing with these issues should manage homeowners carefully to avoid any misunderstandings.
Bonus point: in the case of a claim, always read the policy first
Should there be a claim against a legal indemnity policy, a legal representative’s first response should be to review the policy itself. Do not disclose the existence of the legal indemnity policy to any third parties or communicate with them, including trying to rectify the defect, prior to filing the claim with the insurer as this could jeopardise any potential rectification of the defect or pay out.
Chloe Mulroy, legal indemnity executive, Property Insurance Initiatives
Photo by Benjamin Elliott on Unsplash