I’m developing a site and have taken out restrictive covenant indemnity insurance. Am I right in thinking that I can now do as I like, as I’m covered?
Indemnity insurance does not provide an absolute solution for defective title issues. All it provides is the ability to claim on an insurance policy in the event that someone prevents the development by enforcing the matters covered.
There is an inherent risk in all sites where insurance is taken due to the fact that:
(a) insurance does not correct the defect and
(b) you can only claim on a policy where an insured event happens.
It is, therefore, possible that circumstances can arise that do not amount to an insured event, but which make the site unattractive for a buyer or a funder.
The classic position with insurance for breach of covenants is someone coming forward after the policy has been put on risk, that they have the benefit of covenants and threatening to enforce. The threat itself is not an insured event – there has to be full enforcement action taken against you for the matter to become a claim. However, the existence of the threat would have to be disclosed to potential buyers and funders and this is usually enough to scare them off as no one wants to purchase/fund a property which is subject to a possible dispute.
You are therefore left with no choice but to negotiate with the party claiming the benefit, or take action against that person to demonstrate that their claim has no merit. Any costs or payment made would not be covered by the policy as it would not be in settlement of court action against you.
As you can see, the position is not ideal – but it is one that exists on all sites where insurance is taken. Most developers take a view as, usually, the insurance covers defects where it is virtually impossible to identify the people who could enforce the issues. The risk of the above scenario is therefore low.
There are, however, circumstances where we can ascertain that an identifiable person or group could be able to take advantage of the defect. For example, where covenants are expressed to benefit identifiable land. Insurance may still be available, but if we can see that identifiable parties may be able to claim the benefit, then those other parties could easily see this too and use it to their advantage as set out above – whether or not their claim has any merit.
Normally, this risk is significantly reduced by virtue of the planning process, ie. anyone likely to raise issues will do so once your application is made. This is why insurers often make post planning offers. If you only have an option agreement and people object during the planning process, then you may struggle to get indemnity insurance. No buyers or lenders will proceed without indemnity insurance in place (or, alternatively, the title issues being resolved). There is a risk that you could go to the expense of making a planning application, but then not be able to proceed as you can’t obtain indemnity insurance.
You need to check the insured use, as stated in the policy, as it may restrict what you can do.
You also need to read the policy carefully to ensure that it covers all risks and heads of loss required. Insurance often does not cover all of the losses that you may incur. In particular, it is very unlikely to cover lost profit and often does not cover finance costs. The insurer will try to deal with the claim in the cheapest way possible – this might be to defend the claim, or to pay off the person making the claim, or to pay the difference in market value of the site with the defect and without the defect. If the insurer elects to pay the difference in value, then you will still be left with a site to sell to recover the value that is not covered by the insurance.
You must not contact any third parties who may have the benefit of the covenant about the policy.
The policy is likely to contain restrictions on who you can disclose its existence to.
You should also note that the insurance may not be acceptable to all potential purchasers and lenders.
For more help and information, please contact Isabel Alderton-Sell.