Indemnity Insurance of Restrictive Covenant Bank conveyancing obligations
Bank of Scotland and Accord, as with many lenders, set their own requirements when it comes to restrictive covenant indemnity insurance. The content herein aims to help property law practitioners on the different lender approved list of panel lawyers where the title to be charged incorporates restrictive covenant. Solicitors should still check the CML handbook requirements for each lender, whether it be Leeds Building Society, Halifax or Coventry BS. The information on this page is not focused on restrictive covenant indemnity insurance requirements.
Need help with restrictive covenant indemnity insurance from your lender?
In your capacity as a conveyancing practitioner on a mortgage company panel you must conduct due diligence as to whether the property has been built, altered or is currently used in contravention of a restrictive covenant. Banks such as Bank of Scotland, Accord or Leeds Building Society rely on you to investigate whether the covenant is not enforceable. Should you be unable to provide an unqualified COT 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 taken out on the completion date of the mortgage (see section 9 of the Council of Mortgage Lenders’ Handbook).
Should your investigations reveal evidence that the restrictive covenant has been breached and, after having conducted reasonable enquiries, you are satisfied that the title is good and marketable ; you are able to issue an unconditional COT to the lender and the breach has continued in excess 20 years unchallenged, then restrictive covenant indemnity insurance will not be mandated by the lender.
Yorkshire Building Society and RBS like many banks, requirements are that where restrictive covenant indemnity insurance is to be taken out:
- your firm must point out to the borrower that the borrower will need to comply with any conditions of the restrictive covenant indemnity insurance policy and that the mortgagor should notify the lender of any notice or potential claim in relation to the policy
- your practice must supply a duplicate of the restrictive covenant indemnity insurance to the mortgagor and explain to the borrower why the restrictive covenant indemnity insurance policy was effected and that additional insurance could be necessary if there is further lending against the mortgaged property
- the restrictive covenant indemnity insurance policy needs to be in favor of the bank and, wherever possible, for the benefit of the borrower and any subsequent owner or mortgage company. If the mortgagor will not be covered by the restrictive covenant indemnity insurance policy, the borrower should be informed accordingly.
- the minimum level of cover for the policy must meet the requirements for the bank (see UK Finance Lenders’ Handbook Part 2 )
- you is required to reveal to the insurer all relevant information which you have obtained
- you are responsible for approving the terms of the restrictive covenant policy on behalf of the lender
- the restrictive covenant indemnity insurance policy must be placed on risk without expense to the lender
- the restrictive covenant indemnity insurance policy must not contain terms that you know would invalidate or compromise the interests of the lender
| Lender | Requirement |
|---|---|
| Allied Irish Bank | At least the amount of the mortgage advance. |
| Bank of China | Cover to full value of the property or the Mortgage Advance, whichever is the higher. |
| Bank of Scotland Private | Not less than the Facility plus 10%. |
| 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. |
| Coventry Building Society | Minimum of the value of the property. |
| First Direct | The value of the insurance must be for at least the full value of the property |
| Gen H | An amount equal to the value of the property unless specifically agreed in writing otherwise. |
| 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. |
| Landbay Partners | An amount equal to 100% of the property valuation or purchase price (whichever is greater) plus 10%. |
| Leeds Building Society | An amount at least equal to the amount of the mortgage advance plus 10%. Any indemnity insurance policy must protect the borrowers, any successor in title and any Mortgagee. |
| LiveMore | An amount equal to the purchase price or value of the property, whichever is higher |
| National Westminster Bank | An amount equal to the value of the property. |
| Reliance Bank | \xA31,000,000.00 |
| Skipton Building Society | For lender only cover we will accept a minimum of 110% (index-linked) of the amount of the loan. |
| 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. |
| RBS (One Account) | 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 |
| Virgin | We require the full market value of the Property. Where this isn't available, we'll accept the loan amount as a minimum. |
| Yorkshire Bank | Open market value of property. |
Restrictive Covenant Contingency Insurance : Reflections
The full terms, conditions and exclusions for restrictive covenant indemnity insurance are identified in the policy document. Conveyancing Practitioners are obliged to direct your non-lender client to the restrictive covenant indemnity insurance policy itself. The intention of restrictive covenant indemnity insurance is to grant indemnity in respect of the risks specified in the policy schedule - so you should check the schedule to determine that it is in order. The continuance of this non-investment insurance agreement is in perpetuity unless the policy says something to the contrary. Adequacy in this regard should be checked.Restrictive Covenant Contingency insurance: Important characteristics and benefits:
The insurance will normally cover where someone claims to be entitled to the benefit of the specified risks, stated in the restrictive covenant indemnity insurance schedule. Restrictive Covenant indemnity insurance Policies are likely to cover the following- The cost of altering or destroying 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 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 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.
- All other costs and expenses incurred by the Insured with consent in writing from the relevant insurance company
- Reimbursement for compensation incurred in any proceedings concerning the risks specified in the restrictive covenant policy, as well as legal and associated costs.
- Loss in market value due to the successful enforcement of the risks specified in the restrictive covenant insurance.
Due diligence should extend to checking that the answers on the application form are accurate. However remote the likelihood of a claim on the mortgage company insurance policy might be you can rest assured that the insurer will check the details on any proposal form thoroughly prior to any claim being met.
Restrictive Covenant Indemnity Insurance has limitations - Other considerations
There may be consequences arising from the enforcement of the risks identified in the restrictive covenant policy which are not adequately covered by financial compensation.A good example is a granny annex may have to be destroyed but financial compensation does not recompense for the loss of separate but adjoining accommodation for an elderly relative in need of care. Whilst this is not necessarily of relevance to the mortgage company it my be of importance to your non-lender client.
The above information covers to properties in England and Wales.