Indemnity insurance has become a familiar feature of commercial property transactions. Whether you are buying, selling, refinancing or granting a lease, insurers are often asked to cover risks ranging from missing planning documents to defective titles. It can be reassuring to have it in place, but it is not a universal cure.
Used appropriately, indemnity insurance can unlock stalled negotiations and protect your investment. Used incorrectly, it can mask issues that require deeper investigation. This blog explains what indemnity insurance can (and cannot) achieve, and why professional advice is vital before relying on it.
What Is Indemnity Insurance?
Indemnity insurance is a one‑off policy that protects owners, developers and lenders from financial losses as a result of a specific legal defect that cannot easily be resolved. Common examples in commercial property include:
- Missing or incomplete planning/building regulation documentation
- Absence of rights of way or rights to use services
- Restrictive covenants that may have been breached
- Unknown beneficiaries with potential claims over land
- Defective titles, gaps in deeds or lost documents
- Chancel repair liability
- Absence of landlord consent for works or assignments
Usually policies will cover the financial loss arising if the defect is ever enforced, including legal fees, settlement costs and any reduction in property value as a result of the defect.
The Benefits: Why It Is Used So Often
Indemnity insurance can be extremely useful in commercial transactions because:
1. It Offers Speed
Identifying and resolving a historic title defect or chasing old planning records can be a lengthy process and therefore cause delays. Insurance can allow a deal to proceed without waiting for the underlying issue to be resolved.
2. It Is Usually Cost‑Effective
Premiums are normally modest compared to the value of the property or the cost of addressing the defect directly.
3. Lenders Expect It
Most commercial lenders will require indemnity insurance for certain known risks. Without it, funding arrangements can fall through.
4. It avoids drawing unnecessary attention to the issue
Some defects, such as breaches of restrictive covenants, should not be highlighted to third parties. Insurers often prefer that no enquiries are made, and buyers sometimes accept this approach to avoid triggering enforcement.
The Limitations: Why It Does Not Cure Every Problem
Despite it being useful in certain circumstances, indemnity insurance is not a complete solution. There are some clear limitations.
1. It Does Not Fix the Underlying Defect
Insurance only provides financial compensation.
It does not legalise unapproved works, grant missing rights of access, or remove a restrictive covenant. If your business model depends on using the property in a particular way, insurance may not offer the certainty you need. For example:
A developer purchases a warehouse without documented rights to use an access road. Insurance covers the risk of a claim, but if access is blocked, the site becomes commercially useless. Any financial compensation does not outweigh the cost of lost operational capability.
2. It May Not Cover Future Development
Most policies only protect the existing use. If you plan to redevelop, change use, extend or intensify the operation, the policy may be invalidated.
3. You Must Not Approach Third Parties
Once a policy is in place, or even before it is arranged, you must avoid contacting anyone who may enforce the defect as doing so can render your cover void.
This can restrict your ability to negotiate improved rights or regularise issues with the local authority.
4. It Will Not Protect Against Known or Inevitable Claims
Indemnity insurance will not cover issues that are already known, likely to arise, or already in dispute. If enforcement action is likely, insurance is not an option.
5. Policy Conditions Can Be Restrictive
Policies often include obligations such as:
- Not altering the property without getting consent
- Not disclosing the defect to third parties
- Avoiding taking actions that could lead to enforcement.
These can restrict your freedom to manage or develop the asset.
When Should You Avoid Relying on Indemnity Insurance Alone?
There are situations where legal remedy is the correct and appropriate approach rather than relying on insurance:
- Defective access where physical use of the land is critical
- Onerous restrictive covenants that could impact future development value
- Disputes already known or ongoing
- Where lender requirements cannot be met with insurance alone
- Infrastructure sites such as logistics, manufacturing or data centres where operational certainty is essential
In these scenarios, deeper investigation, negotiation or formal regularisation may be required.
Due Diligence Still Matters
Indemnity insurance does not replace the need for thorough commercial due diligence. A solicitor must first assess:
- The nature of the defect
- The likelihood of enforcement
- The impact on value and use
- Whether practical resolution is achievable
- Whether insurance genuinely addresses the commercial risk
At Ison Harrison, we routinely review indemnity proposals for landlords, tenants, investors and developers. In many cases, insurance is appropriate, but we will not recommend it before assessing the commercial objectives of the transaction.
Practical Example: A Restrictive Covenant Issue
A client purchased a site subject to a Victorian restrictive covenant preventing “industrial activity.” The land had been used as a workshop for over 40 years. The seller proposed indemnity insurance.
Our review showed:
- The covenant holder had long since ceased trading
- The breach was historic and continuous
- Redevelopment plans would make future enforcement more likely
As a result, we advised the buyer to purchase insurance.
Conclusion: Useful Tool, not a Universal Fix
Indemnity insurance is a valuable risk‑management tool, but it is not a cure-all. Every issue needs careful legal review, and the policy should reflect what you want to do with the property, whether that’s buying, leasing, refinancing or developing it.
If you are facing a title defect or your transaction has stalled due to missing documentation, our Commercial Property team can help you assess the risk and find the most effective solution.
For clear, practical advice and a no-obligation consultation contact our Commercial Property specialists today. We act for landlords, commercial tenants, SMEs, developers and investors across the region and nationwide. Call us on 0113 284 5000 or email commprop@isonharrison.co.uk.
