Indemnity insurance is ubiquitous within bridging finance but little is known or understood about this specialist product
We had a 300 per cent increase in new bridging business during March, most of which needed to complete “by the end of the month”, according to the clients. Clearly they were heavily motivated to avoid the increase in stamp duty land tax.
While it is impossible for us to guarantee to meet a deadline, we have become accustomed to qualifying whether we believe a set date is realistic. In our experience, the single biggest factor determining speed of transaction is the legals: the period when lawyers become involved. This could be pre- or post-offer but often commences with a communication between solicitors requesting prerequisites or standard requirements.
Standard requirements differ for residential and commercial conveyancing but most solicitors adopt a pro forma approved by the Solicitors Regulation Authority to start a dialogue. Within the requirements is a need for various searches, including local authority, mining, drainage and environmental, plus chancel and flood reports – some of which take up to six weeks to be returned.
Where there is an urgent deadline (often less than four weeks but sometimes a matter of days), a solution is required to bypass conventional search organisations and provide protection of risk to the proposed lender and client. The solution in question is indemnity insurance, which has gathered sales momentum over the past 20 years. But while it is ubiquitous within bridging finance, little is known about this specialist insurance product and its providers.
Indemnity insurance provides cover for financial loss from risk. The two most common forms within bridging finance are title insurance and search delay, or no-search indemnity.
Title insurance protects the insured from financial loss as a result of a title defect and from unenforceability of mortgages. Title defects include lack of planning permission, a breach of covenant, absence of a right of way or adverse possession (where a property is incorrectly owned).
The defect may have existed for many years and, while it may be possible to analyse it in detail and reach a considered judgement on the issue, it is often far quicker and cheaper to pay the premium and effect an insurance policy.
Title insurance is permitted by all bridging lenders but its application is varied. Some utilise it on every transaction while others permit it subject to strict criteria, often restricting use to larger loans. It is important to remember that this insurance typically protects only the lender. It also does not remedy any potential defects.
It could be argued that blanket use of title insurance by lenders is inappropriate because not all titles will have a defect and, therefore, clients are being burdened with an unnecessary cost. This is potentially true but I have yet to receive negative feedback from a client on paying this cost. Its use permits transactions to be completed quickly and provides much needed lender protection against fraud in a relatively high-risk lending environment. It may be a better solution to allow solicitors acting for lenders to determine when use is appropriate.
The second form of policy widely used is search delay, or no-search insurance. The former covers financial loss relating to any adverse matter between when a search has been applied for and when it is received. Policies often exclude contaminated land or any matter the buyer was aware of at the date when cover commenced. No-search insurance covers the same risk as search delay but with a longer cover period, as searches are often bypassed altogether.
From our experience, search delay and no-search insurance are widely used by clients, sometimes because they need to complete a transaction quickly or the cost is lower compared to applying for full searches. We have experienced instances where delays in local authority searches meant that, if a deadline was to be met, no alternative existed. Delays in returning local authority searches were a particular problem leading up to the stamp duty deadline.
The CML recently put lending figures for March at £25.7bn – 43 per cent up month-on-month. No wonder councils were put under strain and the timeliness of local authority searches suffered.
In order to beat the extra stamp duty, paying for a search delay or no-search insurance policy would, I am sure, have seemed excellent value for money.
Chris Fairfax is managing director at Positive Lending