What is the Insolvency Act, and Who Needs Indemnity Insurance?

The Insolvency Act of 1986, and later, the Enterprise Act of 2002 have impacted British law with respect to homeowner provisions, and court decisions under the insolvency act have meant indemnity insurance is a necessity in cases where the original owner acquired the house for less than market value.

Individuals and businesses facing bankruptcy have occasionally tried to cheat the system by passing on items of value -- primarily houses -- at significantly less than market value, or even for free. By doing this, the individual does not face the possibility that the house itself will be repossessed in bankruptcy proceedings. An example might be the individual who is facing bankruptcy and a high number of debts. Knowing this, he transfers the title to his girlfriend -- saying he has given her the house -- a few months before the inevitable bankruptcy. When his assets are liquidated, the house is not included.

Problems have arisen, however, when the person who obtained the house for free -- or less than market value -- sell the house on to an innocent buyer. In the example above, imagine the individual and his girlfriend split up in an ugly breakup. The girlfriend, having full legal title to the house, sells it at full market value to an unsuspecting new buyer. Later the sale is deemed to be null and void under the law because the girlfriend was not the true owner of the house. The new buyer has now lost his investment.

Because of this exact scenario, and other similar situations arising from the insolvency act, indemnity insurance will be required by a buyer's solicitor if it is found that the original purchase was for less than the true value of the house.

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