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The pitfalls of the use of Indemnity Insurance in property transactions!
It has long been the case that insurance contracts are based on the principal of uberrimae fidae. In effect, the insurer is entitled to rely on having been told everything it needs to know about the surrounding circumstances that would otherwise prevent the insurer from issuing the policy. It should be remembered that silence can be deemed a mis-representation where a fuller diclosure would otherwise have occured.
With the recession, only just in the recent past and many insurance companies watching for the onslaught of claims that a post-recession period often brings, they will look carefully at the lack of information at the inception of the policy.
With pressure to complete transcations quickly increasing particularly from commercial property clients, solicitors should not seek to ‘fix’ title issues with indemnity insurance without full disclosure to and approval from the client (and where applicable the lender). If this is not forthcoming then the only alternative is to address the defect head-on and only proceed when the situation has been normalised.
It has been the case over the years that solicitors have been treating indemnity insurance as a panacea for a wide variety of defects. Moreover, with the advent of self issue policies, based on a checklist one has to say that these policies may in some cases have been issued in inappropriate situations. In order to issue a policy, the solicitor needs to look at the policy a tick a number of boxes. Over time the solicitor learns the matters needed for compliance in particular self issue situations and then forgets the real issues involving surrounding circumstances and whether the policy is indeed appropriate.
What is surrouding circumstances?
The court has recently held in the case of Envirocom that the party applying for insurance must ensure that all of the facts have been disclosed so that the insurer can make the right decision on cover and premium.
In this case, disclosure meant actually giving a detailed explanation of the processes whereby the work carried out was done so that such items as oxy-acetylene lamps can be factored into the risks.
From a property perspective, changes in use of a premises may be deemed surrounding circumstances. Even a post inception change may be considered sufficient to obviate the insurance.
What does this all mean?
1. If a solicitor has issued inappropriate policies (or indeed obtained them directly) then the insurance company will deny risk and leave the solicitor’s own professional indemnity insurer to make the payout, thereby increasing the possibility that the solicitor’s practice may not get insurance in the next insurance year, or if it does at less attractive rates;
2. It is likely as a result of the Envirocom case that solicitors will now be more reticent where previously indemnity insurance was an option. In turn commercial clients will either have to take the risks themselves or accept that certain transactions may have to proceed more slowly. The option in these cases is to have a conditonal contract with a condition precedent relating to the defect and its remedy.