Indemnity Insurance of Restrictive Covenant Bank conveyancing obligations

HSBC and Halifax, in common with the majority of banks, set their own requirements when it comes to restrictive covenant indemnity insurance. This page is designed to help domestic conveyancing solicitors on the numerous 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, for example Virgin Money, Natwest or Coventry BS. The content on this page is not focused on restrictive covenant indemnity insurance requirements.

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In your capacity as a solicitor on a lender panel you must investigate whether the property has been built, altered or is currently used in contravention of a restrictive covenant. Lenders such as HSBC, Halifax or Virgin Money rely on you to investigate whether the covenant is not enforceable. If you are unable to provide 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 completion of the mortgage (see UK Finance Lenders’ Handbook section 9).

Should your investigations reveal evidence of a breach and, following reasonable due diligence, you are assured that there is a good and marketable title ; you are in a position to submit an unqualified certificate of title to the mortgage company and the breach has continued for more than twenty years without challenge, then restrictive covenant indemnity insurance will not be mandated by the lender.

Skipton and RBS like many lenders, instructions are such that where restrictive covenant indemnity insurance is to be put on risk:

the restrictive covenant indemnity insurance policy should be placed on risk without cost to the lender
the restrictive covenant indemnity insurance policy should always be in favor of the bank and, wherever possible, for the benefit of the borrower and any next owner or lender. If the mortgagor will not be covered by the restrictive covenant indemnity insurance policy, you must advise the borrower of this fact.
your firm must approve the terms of the restrictive covenant policy on behalf of the lender
the restrictive covenant indemnity insurance policy must not contain terms that you are aware would invalidate or prejudice the interests of the lender
you is required to reveal to the insurer all relevant information which you have acquired
your practice is duty bound to explain to the borrower that the borrower must adhere to any conditions of the restrictive covenant indemnity insurance policy and that the borrower should notify the lender of any notice or potential claim in respect of the insurance
your practice must provide 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 might be necessary if there is additional lending against the mortgaged property
the limit of indemnity must satisfy the requirements for the bank (See Part II Handbook requirements )

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 Part 2 requirements for banks:

Lender	Requirement
Accord Buy to Let	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.
Bank of China	Cover to full value of the property or the Mortgage Advance, whichever is the higher.
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
Barnsley 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.
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.
Coventry Building Society	Minimum of the value of the property.
Family Building Society	An amount at least equal to the mortgage advance.
Foundation Home loans	An amount equal to 110% of the valuation or purchase price - whichever is the greater.
Landbay Partners	An amount equal to 100% of the property valuation or purchase price (whichever is greater) plus 10%.
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.
Lloyds Bank Private Banking	Not less than the Facility plus 10%.
Masthaven Bank	An amount at least equal to the total mortgage advance. Any indemnity insurance policy must protect the borrowers, any successors in title and any mortgagee.
Paratus	An amount equal to 110% of the valuation or purchase price - whichever is the greater.
TSB	The value of the property
The Mortgage Business	An amount at least equal to the mortgage advance/credit limit - whichever is the highest.
The Mortgage Lender	An amount at least equal to the mortgage advance.
Royal Bank of Scotland	An amount equal to the value of the property.
Vida Homeloans	It must be for a minimum of 110% of the purchase price or valuation, whichever is greater

Restrictive Covenant Contingency Insurance : Reflections

The extent of the terms for restrictive covenant indemnity insurance are shown in the policy document. Conveyancing Practitioners are obliged to direct the borrower to the restrictive covenant indemnity insurance policy document. Restrictive Covenant indemnity insurance is devised to grant indemnity in respect of the risks set out in the policy schedule - so it is essential check the document to determine that it is as it should be. The continuance of this non-investment insurance agreement is in perpetuity unless otherwise stated in the restrictive covenant indemnity insurance policy. Adequacy in this regard should be checked.

Restrictive Covenant indemnity insurance: Important features and benefits:

Protection via such a policy is to cover the risk of third parties looking to enforce rights that can affect the use of a property. Restrictive Covenant indemnity insurance Cover normally includes

The cost of altering or demolishing 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.
Expenses for works (including professional fees) for the purpose of the development started, before the commencement of 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.
Reimbursement for compensation incurred in any proceedings in respect of the risks specified in the restrictive covenant policy, including solicitors charges.
Loss in market value due to the successful enforcement of the risks specified in the restrictive covenant policy.
Money paid with the written consent of the insurance company to liberate the property from the risks specified in the restrictive covenant policy.
All other costs and expenses incurred by the Insured with the written consent of the relevant insurance company

Don't forget to check what is not included in the restrictive covenant insurance e.g. does the policy cover any property that has been altered within the year prior to the policy being put on risk? Does it cover legal costs?

Restrictive Covenant Indemnity Insurance has limitations - Additional considerations

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.

Content on this webpage is for general information for conveyancers and solicitors in England and Wales on the the bank approved panel, it does not constitute advice for members of the public who should contact their lawyer for advice relating to the bank 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. An important exclusion applying to most restrictive covenant Policies is if you make any contact with any party who might cause a claim under the Policy, it can invalidate the cover.

The above information covers to properties in England and Wales.