Indemnity Insurance of Restrictive Covenant Mortgage Company conveyancing requirements

Coventry BS and Leeds Building Society, like many mortgage companies, dictate their own requirements when it comes to restrictive covenant indemnity insurance. This page sets out to enlighten residential conveyancing firms on the different lender solicitors panel where the title for the the property to be mortgaged includes restrictive covenant. Lawyers are advised to familiarise themselves with the Council of Mortgage Lenders’ handbook requirements for each lender, whether it be Lloyds TSB, Accord or RBS. The content on this page is not focused on restrictive covenant indemnity insurance requirements.

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Being a solicitor on a bank panel you must conduct due diligence as to whether the property has been built, altered or is currently used in breach of a restrictive covenant. Mortgage Companies such as Coventry BS, Leeds Building Society or Lloyds TSB rely on you to check that the covenant is not enforceable. If you are unable to issue an unqualified certificate of title to the mortgage company as a result of the risk of enforceability you must ensure (subject to the UK Finance Lenders’ Handbook paragraph 5.11.2) that indemnity insurance is taken out on completion of the mortgage (see section 9 of the Council of Mortgage Lenders’ Handbook).

Should your investigations reveal evidence of a breach and, only after reasonable due diligence, you are satisfied that the title is good and marketable ; you are able to issue an unconditional certificate of title to the bank and the breach has continued for more than twenty years without challenge, then restrictive covenant indemnity insurance will not be insisted upon by the lender.

Skipton and Barnsley BS like the majority of banks, obligations require that where restrictive covenant indemnity insurance is to be taken out:

the restrictive covenant indemnity insurance policy should not incorporate conditions that you are aware would void or prejudice the interests of the lender
the restrictive covenant indemnity insurance policy must be placed on risk at no expense to the bank
you are responsible for approving the terms of the restrictive covenant policy on behalf of the bank
the restrictive covenant indemnity insurance policy needs to be in favor of the mortgage company and, if possible, for the benefit of the mortgagor and any next owner or mortgagee. Where the borrower will not be covered by the restrictive covenant indemnity insurance policy, the mortgagor should be informed accordingly.
your firm must reveal to the insurer all relevant information which you have obtained
you must send a duplicate of the restrictive covenant indemnity insurance to the borrower and explain to the borrower why the restrictive covenant indemnity insurance policy was effected and that a further policy may be mandatory if there is further lending against the security of the property
your practice must explain to the borrower that the borrower will need to adhere to any conditions of the restrictive covenant indemnity insurance policy and that the mortgagor should notify the bank of any notice or potential claim in respect of the insurance
the level of indemnity must satisfy the requirements for the mortgage company (see UK Finance Lenders’ Handbook Part 2 )

Regarding the extent of cover for the restrictive covenant indemnity insurance policy (or for that matter any indemnity insurance), consider the following sampling of Section 9.2 of the Part 2 requirements for banks:

Lender	Requirement
Bank of Ireland	The limit of indemnity must be an amount not less than the market value of the property.
Bank of Ireland Mortgages	The limit of indemnity must be an amount not less than the market value of the property.
Barclays plc	Higher of purchase price or valuation
Better HomeOwnership	An amount to cover the mortgage advance as a minimum.
Birmingham Midshires	An amount equal to at least 110% of the purchase price or value, whichever is higher.
First Direct	The value of the insurance must be for at least the full value of the property
Fleet Mortgages	An amount at least equal to the valuation of the property.
Foundation Home loans	An amount equal to 110% of the valuation or purchase price - whichever is the greater.
Godiva Mortgages	Minimum of the value of the property.
Halifax	An amount at least equal to the mortgage advance.
Hodge	An amount equal to the purchase price or value, whichever is higher. Any indemnity insurance policy must be for our benefit, that of any transferee/assignee (legal or equitable) of the mortgage, the borrower(s) and any successor in Title.
National Westminster Bank	An amount equal to the value of the property.
New Street Mortgages	Must be for a minimum of 110% of the purchase price or valuation whichever is the greatest.
Pepper Money	An amount equal to at least 110% of the purchase price or value, whichever is higher. Any indemnity insurance policy must be for our benefit, that of any transferee/assignee (legal or equitable) of the mortgage and also the borrower(s).
Principality Building Society	Full market value of the property is preferred but if this is not available we will accept the loan advance amount as minimum. You must approve the policy on our behalf. The estimated property value is stated in the Mortgage Offer in remortgage cases. Otherwise it will be stipulated in the Valuation.
Reliance Bank	\xA31,000,000.00
Scottish Widows	The value of the property.
St James Place	An amount at least equal to the total of the initial mortgage advance plus any pre-agreed reserve. These amounts will be shown in the mortgage offer.
The Mortgage Lender	An amount at least equal to the mortgage advance.
Ulster Bank	An amount equal to the value of the property.

Non lender-specific considerations

The extent of the terms for restrictive covenant indemnity insurance are identified in the policy paperwork. Conveyancing Practitioners should point your non-lender client to the restrictive covenant indemnity insurance policy paperwork. The intention of restrictive covenant indemnity insurance is to grant indemnity in respect of the risks set out in the policy schedule - so you should check the schedule to ensure it is correct. The lifetime of this non-investment insurance agreement is in perpetuity unless the policy says something to the contrary. Again, please check that this is as you expected.

Restrictive Covenant indemnity insurance: Significant features and benefits:

This policy would usually provide protection from financial loss that might arise in the event of a third party making a cliam in respect of the risks identified in the policy document. Restrictive Covenant indemnity insurance Cover normally includes

Liability for damages or compensation incurred in any action regarding the risks specified in the restrictive covenant insurance, including incurred costs and expenses.
The cost of works (including architects’ and surveyors’ fees) for the purpose of the development started, before the commencement of proceedings for the enforcement of the risks specified in the restrictive covenant indemnity insurance, to the extent that such costs are rendered abortive by court order.
Diminution in value resulting from the successful enforcement of the risks specified in the restrictive covenant indemnity insurance.
All sums paid with the written consent of the insurance company to liberate the property from the risks specified in the restrictive covenant indemnity insurance.
The cost of altering or taking down all, or part of the development and the reinstatement of the land, insofar as such alteration, demolition or re-instatement is made necessary by court order.
All ancillary costs and expenses incurred by the Insured with consent in writing from the relevant insurer

Due diligence should extend to checking that the answers on the application form are correct. Regardless of how remote a claim on the bank insurance policy might be you can rest assured that the insurer will check the details on any proposal form thoroughly before any claim is met.

Other considerations for restrictive covenant indemnity insurance

Restrictive Covenant Indemnity policies can provide effective protection, but non-lender clients should be asked to give pause for thought and consider that the consequences of not being able to enjoy the property as anticipated may mean that restrictive covenant indemnity cover will not necessarily be the answer.

For instance if your client has to significantly change their dream home, they may feel that they would have been better of not buying in the first place.

Information provided on this webpage is for general information for Regulated law firms in England and Wales on the the mortgage company conveyancing panel, it does not constitute advice for members of the public who should contact their lawyer for advice relating to the lender indemnity insurance. Whilst we endeavour to keep the information up to date and correct we do not make any representation or warranties of any kind about its completeness, accuracy, reliability or suitability. Any reliance you place on the information is strictly at your own risk. Lexsure will not be liable for any direct or indirect loss or damage arising out of or in connection with the use of this information. Do not attempt to contact the person who you think may have the benefit of the restrictive covenant as insurers will almost always invariably refuse to insure if there has been any attempt in this respect. Once you have approached the other party insurance may well become impossible and this would in all likelihood close down indemnity insurance as an option of addressing the restrictive covenant problem.

The above information covers to properties in England and Wales.