Contingency Indemnity
Introduction
During the conveyancing process lenders can be vulnerable to numerous events outside their control, all of which may affect their loan security. These factors can range from the potential that a borrower fails to arrange or renew suitable buildings insurance, to the risk of squatters taking unlawful possession of a property.
A new approach
In order to minimise losses as a result of external factors, Excel’s Contingency liability offers you protection against a wide variety of risks that are grouped under three main headings:
Buildings risks
In possession risks
Entire portfolio risks
Buildings Risks
This element provides you with security from risks after a property has been damaged or destroyed. Specific covers include:
Freedom of agency
Where a mortgage is granted on a property and the borrower opts to arrange their own buildings insurance, your loan security is automatically protected if they fail to do so and the property is either damaged or destroyed as a direct result of the borrower:
- failing to arrange, maintain or renew suitable insurance
- not insuring against the full range of fire and other material damage risks
- insuring for an inadequate amount
- opting not to make or pursue a valid insurance claim
- not utilising the proceeds of any claim to repair the damage for which the claim was made or to repay or reduce the amount of the outstanding debt
- invalidating the insurance cover in respect of the property by any act of delay, error or omission.
No adequate rights of support
You may be held liable when a mortgaged property is destroyed or damaged without there being adequate rights of support, protection or repair for the owner of an adjacent property.
Residual legal liability to reinstate
In order to comply with local authority requirements, you may have a legal liability to reinstate a property following damage or destruction.
Unoccupied properties
You have no control over how long a borrower leaves their property unoccupied and this has the potential to invalidate their house insurance. This element of the cover protects against loss or damage, where a property is left uninsured by operation of an “unoccupied property” exclusion, contained in a policy arranged by a borrower.
In Possession Risks
Cover within this section is designed to protect you from unforeseen risks and subsequent losses when taking possession of a property, after a borrower has defaulted on their mortgage and you are unable to sell with vacant possession.
Inability to obtain vacant possession
You may be unable to gain vacant possession and therefore sell the property following default by the borrower because:
- a squatter has taken unlawful possession
- a tenant has become protected under the Rent Act
- another party has established an equitable and/or overriding interest in the property
- an agricultural or business tenancy has been created
- the tenant has diplomatic immunity
- the property is occupied by a tenant protected under the provisions of Part 2 of the Housing Act 2004.
Forfeiture of lease
If a borrower holds a leasehold interest which forms the security of a mortgage, the lender in possession can be at risk if the borrower is evicted following forfeiture action being taken.
Forced sale suit
Following repossession, a borrower may claim that you did not achieve the full market value when selling a property, and seek to take legal action to recover the additional funds.
Land charges search delay
An adverse entry may be revealed by a search that affects the value of the house that had not been received by your solicitors, before the mortgage began.
Improvement grant liability
In Right to Buy cases, if a council tenant has applied to the local authority for an improvement grant and subsequently defaults, the lender may be liable to the local authority to repay the grant.
Land Registry delay
You may incur a loss when a mortgage has been granted on a property before it has been registered at H M Land Registry.
Sale of hire purchase goods
You may suffer a loss through being unable to recover all the outstanding debt on a property, due to having to compensate the creditor under a hire purchase or credit agreement, for personal goods left in the property.
Sewer indemnity
A mortgaged property may have a liability to the local water authority because all or part of the building has been erected over a sewer.
"Right to Buy" liability
You may have to repay a local authority their loan due to “Right to Buy” legislation on repossession of a mortgaged property.
Consumer Credit Act 1974
Due to inadvertent non-compliance with requirements of the Act, it may not be possible for you to obtain possession of a property.
Entire Portfolio Risks
These are a group of risks that can affect properties within a lender’s entire portfolio, even if you are not in possession.
Loss from another mortgagee's power of sale
If you take a second charge on a property you could suffer a loss if the lender with the first charge sells the property, and there are insufficient funds left to reimburse your loan.
Erroneous vacation
You could suffer a loss by accidentally issuing a vacating receipt, to a customer who still has outstanding payments to make on their mortgage.
Inadequate compensation under mining/pumping Acts
Properties in certain areas of the country are subject to legislation under the Coal Mining/Cheshire Pumping Acts. For example, if a property is discovered to have been built on land suffering from subsidence caused by coal mining, the compensation package offered may prove inadequate to pay the outstanding debt owed to you.
Local authority order
A mortgaged property may be affected by a blight notice, a demolition, clearance or closing order from a local authority, which adversely affects the market value of the property.
Re-entry by third party on default
You could suffer a loss if a third party, who is owed money by the borrower, re-enters a property as a result of the defaulting borrower failing to fulfil a chief rent charge, in order to recover goods to the value of their loan.
Further advances / remortgages
A loss could be suffered when you grant a further advance / remortgage because you may:
- be aware of the existence of a second mortgage
- not receive the title deeds because these are with H M Land Registry
- act upon a letter of postponement
- be unaware that a property is vested in another person by operation of law
- not carry out the usual searches and enquiries.
Contingency - key benefits
- Automatic protection for your entire residential property portfolio against losses caused by events outside your control
- Flexible cover - the policy automatically extends cover and all benefits for up to 60 days from the completion of a merger with, or acquisition of, another mortgage lender or mortgage portfolio
- No claims discount where your policy is running claim free
- CML Handbook compliant.
Our policy wordings are available on request. Please contact us to request a copy.
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