Better cover all-round

David Butti looks at the increasing use of indemnities to provide extra cover against litigation in property transactions. David Butti is legal indemnities manager at Greystoke Legal Services.

It seems that a growing awareness of rights and entitlements is creating an increasingly litigious society. Consequently, the past few years have seen a proliferation of many different forms of specialist insurance.

In particular, there has been an increasing demand for insurance from solicitors who are concerned about the possibility of clients turning to litigation if they think they have received poor advice or have not had a defect adequately explained.

A solution lies in an indemnity, defined by the Oxford English Dictionary as “compensation for loss” or, more soberingly, “a sum exacted by victorious belligerent as one condition of peace”.

Legal indemnities are relevant in many trustee and probate situation, but most are arranged in respect of property transactions.

Mortgagees are becoming increasingly aware of the problems that can be caused by defects in title: in fact, the term can cover a multitude of problems. The most common include situations such as the lack of rights of way or easements; lost or missing title deeds; claims for possessory title; and the lack of a full title guarantee.

Often the defect is caused by a possible, an intended or an actual breach, or simply by a lack of knowledge of restrictive convenants affecting the property.

Until recently, many defects in title were accepted as a minimal risk by all parties and the risk itself was accepted as not warranting insurance cover.

An example of this would be the 300-year-old cottage on a private access way that has been used as such by many previous generations. Despite the prescriptive right acquired over the years, mortgagees will now insist on a defective title policy because they are keen to make sure that everything is watertight. This covers lack of legal rights of access and easements, even where clear evidence can be supplied by statutory declaration to support the usage and no change in usage of the property is intended.

This example highlights the trend of lenders to prevent solicitors and clients “taking a view” on an issue. Either through ignorance – or by applying house rules that insist that every potential defect is covered – control is taken away from purchasers, adding to the cost of house buying.

A further area of demand lies in deed-of-gift indemnities. Most lenders will insist on protection wherever a transfer of undervalue either has been, or may have been, made.

The interpretations of those situations which mortgagees insist upon fall within the parameters of Sections 339-342 of the 1986 Insolvency Act and are varied, encompassing:

cash deposits by parents;

price allowances in inter-family sales for property improvement costs;

matrimonial settlements;

where the price paid is below building society valuation;

transfers at undervalue between family members.

As a rule, cover for mortgagees is freely available with the minimum of information needed in advance. Purchaser cover is also generally available, providing the transaction is at arm's length and free from any relationship between purchasers and the parties to the transfer at undervalue.

Suits for the suits

IT IS Not just the high street practices that have to be aware of potential claims. Some of the biggest names in UK law have had to battle it out with disgruntled or disappointed clients.

The year 1995, at the tail-end of the recession, seems to have been one when tempers snapped more quickly than ever. It was a long, hot summer of suits for the suits.

Simmons & Simmons was hit when Frere Cholmeley Bischoff issued a writ on behalf of Arab Bank, claiming negligence in a report on the Lingfield industrial estate in Darlington. The action was later settled for a nominal amount.

Around the same time, four of Canada's largest banks instructed Freshfields in a suit against Clifford Chance, claiming breach of contract and fiduciary duty and negligence.

The banks wanted £610m to compensate for a £450m loan to the Canary Wharf developer Olympia & York, which became insolvent in 1992.

This case is still ongoing.

The firm was being sued simultaneously by Zappia Middle East Construction – also of Abu Dhabi – and by merchant bank BZW. No steps have been taken in this case since 1995.

Although things were quieter last year, they were not without their moments.

In September, it was Freshfields' turn to be on the receiving end when the Bank of Ireland claimed the firm had acted negligently and in breach of contract when its insurers refused to pay out for damages claimed by merchant bank NM Rothschild. The Bank of Ireland said Freshfields should have given it a warning.

That claim has been reduced to £5m, and is still being vigorously defended.

The next month Simmons & Simmons was back in the news, when it came to an “eleventh hour” settlement over a £50m claim from Banque Bruxelles Lambert.

The bank claimed that the firm had failed to mention that a property against which it was lending money was not actually registered in the borrower's name.

With attention already focused on the SIF, and rumours of another recession, firms of all sizes will have to reconsider how they structure their cover.