Indemnity Insurance of Restrictive Covenant Bank conveyancing requirements

Virgin Money and Chelsea BS, in common with most banks, set their own specific instructions when it comes to restrictive covenant indemnity insurance. This page sets out to enlighten domestic conveyancing solicitors on the various bank approved list of panel lawyers where the title for the the property to be mortgaged contains restrictive covenant. Solicitors should still check the Council of Mortgage Lenders’ handbook requirements for each mortgage company, whether it be Barclays, Halifax or Leeds Building Society. The information on this page is not focused on restrictive covenant indemnity insurance requirements.

Need help with restrictive covenant indemnity insurance from your lender?

Find a Solicitor Find a Mortgage Broker Find More Help

In your capacity as a solicitor on a mortgage company panel you must investigate whether the property has been built, altered or is currently used in contravention of a restrictive covenant. Mortgage Companies such as Virgin Money, Chelsea BS or Barclays rely on you to check that the covenant is not enforceable. If you are unable to issue an unqualified certificate of title to the lender 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 on risk on the completion date of the mortgage (see section 9 of the Council of Mortgage Lenders’ Handbook).

If there is proof that the restrictive covenant has been breached and, after having conducted reasonable due diligence, you are satisfied that there is a good and marketable title ; you are able to issue an unconditional COT to the lender and the breach has continued for more than 20 years unchallenged, then restrictive covenant indemnity insurance will not be insisted upon by the lender.

RBS and Skipton like the majority of lenders, instructions are such that where restrictive covenant indemnity insurance is to be taken out:

the level of indemnity must satisfy the requirements for the bank (See Part II Handbook requirements )
your practice must disclose to the insurer all relevant information which you have acquired
the restrictive covenant indemnity insurance policy should not contain terms which you know would invalidate or compromise the interests of the bank
you must send a copy of the restrictive covenant indemnity insurance to the mortgagor and explain to the mortgagor why the restrictive covenant indemnity insurance policy was effected and that additional insurance could be necessary if there is additional lending against the mortgaged property
your practice are responsible for approving the terms of the restrictive covenant policy on behalf of the lender
the restrictive covenant indemnity insurance policy should be effected at no cost to the mortgage company
the restrictive covenant indemnity insurance policy must be in favor of the lender and, if possible, in favour of the mortgagor and any next owner or lender. If the borrower will not be protected by the restrictive covenant indemnity insurance policy, the borrower must be informed accordingly.
your practice is duty bound to explain to the mortgagor that the borrower will need to adhere to any conditions of the restrictive covenant indemnity insurance policy and that the mortgagor should notify the lender of any notice or potential claim in respect of the insurance

As to the level 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 CML handbook PII requirements for mortgage companies:

Lender	Requirement
Bank of China	Cover to full value of the property or the Mortgage Advance, whichever is the higher.
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.
Chelsea Building Society	An amount at least equal to the amount of the mortgage advance. Any indemnity insurance policy must protect the borrowers, any successors in title and any mortgagee.
Cynergy Bank	The market value of the property.
Darlington Building Society	The higher of value or purchase price of the property.
First Direct	The value of the insurance must be for at least the full value of the property
Foundation Home loans	An amount equal to 110% of the valuation or purchase price - whichever is the greater.
Gen H	An amount equal to the value of the property unless specifically agreed in writing otherwise.
Habito	Higher of purchase price or valuation
Keystone Property Finance	An amount equal to 110% of the valuation or purchase price - whichever is the greater
Landmark	Preference for full market value of the property, but if this level of cover is not available, will accept a minimum of the actual loan amount. You must approve the policy on our behalf.
ModaMortgages	An amount at least equal to 110% of the mortgage valuation.
Mortgage Express	Amount of loan + 15%
Paratus	An amount equal to 110% of the valuation or purchase price - whichever is the greater.
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).
Perenna	The higher of the purchase price or valuation.
TSB	The value of the property
Yorkshire Bank	Open market value of property.
Yorkshire Building Society	An amount at least equal to the amount of the mortgage advance. Any indemnity insurance policy must protect the borrowers, any successors in title and any mortgagee.

Non lender-specific considerations

The extent of the terms for restrictive covenant indemnity insurance are shown in the policy paperwork. Conveyancing solicitors should direct your non-lender client to the restrictive covenant indemnity insurance policy paperwork. Restrictive Covenant indemnity insurance is devised to provide indemnity in respect of the risks set out in the policy schedule - so it’s important to check any draft to determine that it is in order. The duration of this non-investment insurance contract is in perpetuity unless the policy says something to the contrary. Again, please check that this is as you expected.

Restrictive Covenant Contingency insurance: Important characteristics 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 Policies should be checked for the following

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.
Money paid with the written consent of the insurance company to free the land from the risks specified in the restrictive covenant indemnity insurance.
All other costs and expenses incurred by the Insured with the written consent of the relevant insurer
Expenses for works (including architects’ and surveyors’ fees) for the purpose of the development begun, or contracted for, prior to proceedings for the enforcement of the risks specified in the restrictive covenant policy, to the extent that such costs are rendered abortive by court decision.
Diminution in value resulting from the successful enforcement of the risks specified in the restrictive covenant policy.
Cover for compensation incurred in any proceedings in respect of the risks specified in the restrictive covenant indemnity insurance, as well as incurred costs and expenses.

Don't forget to consider what is not included in the restrictive covenant indemnity insurance e.g. does the policy cover any property that has been altered within the year prior to the commencement of the policy? Are legal costs covered?

Additional considerations for restrictive covenant indemnity insurance

Bear in mind, that if a covenant is breached and changes have to be made, simply getting monetary compensation from restrictive covenant insurance may be adequate for your client.

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 contained within this webpage is for general information for Regulated law firms in England and Wales on the the lender conveyancing panel, it does not constitute advice for members of the public who should contact their lawyer for advice relating to the mortgage company 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 content set out above is in relation to properties in England and Wales.