What is search indemnity insurance and why is it needed?
As part of the conveyancing process, solicitors submit ‘searches’ to various public authorities. These searches include (amongst others) a local authority search, an environmental search and a drainage and water search. These searches are used to help solicitors identify potential issues with the property and give an opportunity for the buyer to withdraw or negotiate the price if an adverse result is found.
However, there are a number of circumstances in which a buyer may seek to proceed without the relevant searches. Such circumstances include the following:
- Where there are time constraints and the buyer must exchange or complete quickly. Searches usually take around 3 weeks to be returned and sometimes buyers simply do not have the time to wait. With the stamp duty holiday deadline looming we are likely to see this scenario cropping up frequently in March.
- Where there are long delays with the searches. Currently, due to their computer system being hacked, Hackney Council have a current turnaround of 171 days to return a Local Authority search. Last year Camden Council had similar issues and had a 100 day turn around. In these instances, buyers and sellers are not likely to want to delay the transaction whilst waiting for the results.
- Where searches have been obtained relatively recently for the property. This scenario often arises with new build purchases where searches were ordered prior to exchange of contracts, however by the time the construction has finished and the parties are ready to complete, the searches are considered 'out of date'.
In the above circumstances, a cash buyer may decide to proceed either without searches or as an alternative they have the option to purchase a search indemnity policy (i.e. a no search indemnity policy, a delayed search indemnity policy or a search validation indemnity policy).
What does a no search indemnity policy do?
The risks covered by search indemnity insurance vary between providers, however generally they will cover any loss sustained as a result of adverse entries which would have otherwise been revealed had a search been carried out prior to completion of the transaction. Loss is usually calculated to the value of any financial charge revealed or as a reduction in market value of the property.
Cover is usually conditional upon the buyer having no knowledge of the potential entry and that cover is not available to you under your household insurance policy.
What if I have a mortgage?
Most mortgage lenders will stipulate that the borrower must order searches as part of their terms and conditions, however each lender is different. It is worth noting that where there are long delays on the Local Authority searches, even lenders who would otherwise require searches do sometimes permit search indemnity policy in place of searches.
Risks of completing based on a search indemnity policy
While search indemnity insurance provides some cover in case of damage to the property, it offers no protection to the buyer's quality of living once they have moved in to the property. For example, moving into a property which is liable to heavy flooding or subsidence may be difficult to live with and cause issues with selling the property in the future.
Furthermore, searches may reveal things which would have otherwise deterred a buyer from purchasing a property in the first place. For example, a planned road or railway scheme could negate an aspect of the property which had been a major selling point. Alternatively, the buyer may have planned to cut down several trees to allow more light, however a local search may reveal that these tress are subject to a tree preservation order and that cutting them down is not possible.
Overall
Each case is specific to its requirements and while search indemnity insurance can be very useful to proceed with the purchase without delay, buyers should carefully consider the risks of proceeding on the basis of search indemnity insurance.
Jessica is an Associate in our Residential Property team.
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