Title Indemnity Insurance

21 October 2022

Whether you’re buying or selling a property in Scotland, you might be faced with a problem in the property’s title and wonder how this can be addressed with minimum hassle and cost. A title indemnity insurance policy may be the answer.

What is title indemnity insurance?

Title indemnity insurance provides compensation for financial loss caused from certain claims which may arise due to a defect in the title or other regulatory aspect of the property. The insurance policy does not fix the defect. Rather, it is put in place to protect against financial loss caused by the defect. Most policies also cover the legal expenses incurred if a claim is raised.

Examples of when you might consider a title indemnity insurance policy

Deficient title – the owner may occupy more ground than they legally own or they may exercise rights over someone else’s ground without these rights being expressly provided for in the title.
Lack of local authority consent – the owner may not have obtained planning permission, a building warrant or completion certificate for any works done on the property (including the erection of a new structure and alterations made to existing structures).
Acquisition of a property for less than value – where a lender is involved but the property has been purchased by the owner for less than value / gifted to the owner, the lender’s interest will need to be protected in the event of the previous owner going bankrupt within five years of the transfer.

In practice

Generally, the policy is obtained by the seller who pays a one-off premium which varies depending on the property value and the perceived risk. They are usually obtained to offer a quick and cost-effective solution, however they are not appropriate in all cases. It must be noted that they do not rectify the defect – the policy simply offers protection if a third party raises a claim relating to the defect.

For a title indemnity policy to be a viable option, it’s important that the title defect is not disclosed to any potential claimants. For example, where there are concerns over whether local authority consents have been obtained for works carried out to the property and an indemnity policy is being considered, neither party should approach the local authority to ascertain if such consents exist or to obtain retrospective consents. If there are no rights of access in the title, the owner of the access track should not be approached to create formal access rights.

Future transactions

In most cases, a policy lasts indefinitely or until the problem has been rectified, e.g. some defects are corrected by the passage of time. Successive owners can benefit from the policy. However, any future defects which come to light and are not referred to in the existing policy wouldn’t be covered. A separate policy would need to be put in place.

It’s important that the title defect or the existence of the policy is not disclosed to others. This would most likely invalidate the policy. The exception to non-disclosure of the defect is where the owner is selling the property, in which case the existence of the policy must be disclosed to future buyers. This is because the policy “runs with the title” and passes on to subsequent proprietors until the defect no longer exists or is remedied.

Obtaining a title indemnity policy

Such a policy can be purchased from a number of insurance providers. The insurer will need to know the background of the legal defect in order that a policy can be drawn up and a premium quoted. As with any other insurance policy, a title indemnity policy is a contract of good faith and there is a requirement to disclose all necessary facts and to make no misrepresentations. Failure to comply with the terms of the policy may have the effect of invalidating the policy.

For further information on the issues raised here, please contact Laura Sinclair, rural land management expert.

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