Legal contingency insurance: overview
Types of legal contingency insurance
29 August 2009
Legal contingency insurance policies provide protection for a variety of problematic circumstances that may arise during property transactions
On occasion these unforeseen problems can escalate and develop a make or break situation, especially when revealed at the latter stages of the process. Ultimately, these bespoke insurance policies offer effective last-chance solutions where the only alternative result to insurance is the deal not going through.
Whilst the insurance market for legal contingency insurances is limited, underwriters do recognise that there is a need for affordable solutions, specifically to enable property transactions that may otherwise fall through to be completed. Policies are often bespoke wordings tailored specifically to the problem. They do differ from traditional property cover and some of these differences are listed below:
- Property type and use: these factors are not usually considered when pricing the risk.
- Term of cover: usually in perpetuity.
- Sum insured: based on a 'limit of indemnity', which will be the maximum insurers may pay out in the event of a claim - ideally this limit would be the market value or development values. In addition, there are provisions to increase the indemnity limit if necessary, for example:
- by paying an additional premium (mid-term); or
- depending on the type of risk, by including an inflation provision in the policy - the limit will automatically increase during a fixed period from the start of the policy.
- Settling claims: the sum paid out by the policy is based on the compensation paid to a third party for the loss of their rights ('compensation for the loss') or the costs to the policyholder of remedying the problem and the potential loss in value of the property ('financial loss'). The table below provides details on the type of settlement each product allows.
- Change of property owners: if the property is sold, the cover can be assigned to the purchasers of the land and their mortgagees.
The table below explains the typical insurance products available along with a brief explanation of what event might be covered by the policy.
|Insurance product||Explanation||What the insurance covers|
|Chancel repair||Former rectorial land may have liability attaching for the repairs to the chancel of the parish church.||The financial loss arising from the local church seeking finance for repairs to the chancel.|
|Defective leases||Lease wordings can result in ambiguity arising from poorly constructed clauses or silence on issues.||The financial loss arising from contentious issues arising out of ambiguity.|
|Judicial review||Once planning permission has been granted, interested parties have 3 months and 14 days to challenge the decision by applying for judicial review.||The financial loss arising from the judicial review overruling the planning permission.|
|Search indemnities||Searches can be delayed and may not be performed prior to the completion of a sale.||The financial loss arising from unknown issues which would otherwise have been discovered by a search.|
|Lack of adequate services/access||Rights of way and rights to lay and connect services to a property have not been established properly.||The financial loss arising from the legal title owner of the land or neighbouring land not allowing such rights to be exercised.|
|Breach of warranty on portfolio sales||To complete a portfolio sale there are occasions where limited or no due diligence is carried out.||The financial loss arising from unknown issues which would otherwise have been discovered through due diligence.|
|Defective title/adverse possession||The true legal owner of property or land is unknown.||The financial loss or compensation for the loss arising from challenges to the title.|
|Restrictive covenants||A restrictive covenant prohibits a particular activity being carried out.||The financial loss or compensation for the loss arising from a third party attempting to enforce the covenant.|
|Easements||An easement is a property right held by a third party which affects another area of land in separate ownership.||The financial loss or compensation for the loss arising from the easement being upheld by the third party.|
|Rights to light||A right to light is a form of easement affording protection to property owners of the natural light that their property receives.||The financial loss or compensation for the loss arising from the right to light being upheld by the third party.|
|Lost title deeds||Without title deeds there is a risk that the seller is not the legal owner of the property and that covenants and easements exist that would be unfavourable for the purchaser.||The financial loss or compensation for the loss arising from unknown issues which would otherwise have been discovered had the title deeds been available.|
|Possessory title||Where the Land Registry is not completely satisfied about the vendor's ownership of the property, they may grant a possessory title (as opposed to a title absolute).The purchaser may therefore be concerned that the property is owned by another party.||The financial loss or compensation for the loss arising from an unknown party seeking to claim ownership of the property.|
This information only provides a general overview of the main types of legal contingency insurance. If you are considering taking out such insurance you should seek further guidance from an insurance broker.
Jeremy Canvin is Head of Development Property at Bluefin