Arranging Latent Defects Insurance
There are a dozen or so insurers involved with latent defects but many restrict themselves to significant multi-million projects only. Rowlands & Hames has access to all major insurers including those available at Lloyd’s of London.
The market is very small for risks i.e. less than £2m capital cost is very restrictive, plus minimum premiums audit costs can be an issue, but placement is available.
To obtain terms for a new building, underwriters will want to know details of
A) The proposer
B) The new building
C) The parties to the contract
These form the physical rating features.
In addition, the following factors affect the premium rating level:
The period of cover required (the original French cover was for 10 years, hence the term ‘decenniel’, but 12 years is now far more common in the UK – and costs just a little more)
The level of deductible for which the Insured opts – £10,000 is the usual minimum for buildings up to £1m reinstatement value but for larger buildings anything up to £1m can be provided
The method of maintaining an up to date sum insured over the period of cover – this can either be done by reviewing the sum insured at each anniversary and paying pro-rata additional premiums or opting for a fixed rate increase e.g. 5% per annum compound and paying for that level of increase at the outset.
Simple latent defects proposal forms are available to collect all of this information.
These factors all affect the rate charged which will typically fall between £5 and £10 per £1,000 sum insured – the sum insured being the reinstatement cost of the completed building – this should include an amount in respect of professional fees, debris removal and demolition costs.
The Technical Audit Function
In addition to the above premium, underwriters are likely to require a deposit premium to cover the cost of an audit of the design and construction. The purpose of this audit is to try to prevent damage which may detected by an extra pair of eyes employed specifically for that purpose.
It can happen that the original design team is too close to the action and can miss the obvious.
Examples which have been spotted by auditors have included:
- unrestrained columns
- poor reinforcement placement in a floor slab
- inadequate reinforcement specified
- absence of wall ties
- lack of movement joints
- cross bracing moved by architect
- gable end drainage channel omitted
- out of sequence work leading to inadequate flashing detail
- inadequate fixing of facade to structure
- roof membrane laid incorrectly
Not only have these saved insurers from potential claims but they have saved the building owner from considerable upheaval and discontent from their tenants – not to mention the deductible! Such errors can be put right by the builder prior to handover.
The team of engineers used for this purpose tend to be very experienced structural engineers who have been carrying out technical audits for a number of years.
The technical auditor’s role is solely to try to prevent a claim occurring and not to cause disagreement. Their function is to confirm to underwriters that to the best of his knowledge the building does not present any known defect in design or construction. If they are unhappy with any feature they will try and resolve the problem with the proposer’s nominated representative on site.
If this is not possible the matter will be referred back to the underwriter to resolve with the proposer. This tends to be very rare because both the proposer and the underwriter have the same aim – a building with no know defects and if a technical auditor has identified a potential problem, the proposer will normally want it resolved, rather than run the risk of a defect, either in design or construction, which has been identified.
At practical completion, if the technical auditor considers the building or structure has been built to an appropriate standard and is in compliance with approved drawing and agreed specification, he or she will then issue the appropriate certificate of approval or acceptance and confirm to the insurer that the building is suitable for latent defects cover.
The cost of the audit varies from project to project and is affected by a number of factors. Except on small projects, it is usually less than 25% of the premium.
The Latent Defects Policy
Once the technical audit has been completed and practical completion has been achieved, a formal offer of cover is made. This offer usually reiterates the terms indicated at the outset and gives the proposer 90 days to decide whether or not to proceed.
The insured can be the developer, owner, tenant or provider or financier (or any combination of these). Once issued it is then freely assignable to any party acquiring an insurable interest in the building, during the currency of the policy.
The premium for the full period is normally payable at inception.
The main exclusions specific to Latent Defects Insurance are:
- the deductible
- damage discovered outside the period of insurance
- anticipated or planned for movement, settlement, shrinkage or expansion
- abnormal use of overloading
- wear and tear or inadequate maintenance
- change in colour or ageing process
- the contractor’s contractual obligations for snagging
- damage to paint and other surface coatings
The Basis of Settlement
Latent Defects cover is intended to operate on a reinstatement basis including the cost of remedial work to prevent further damage. Payment of claims is on the basis of damage to ‘structure’ having occurred, giving faster settlement than if legal liability has to be proved.
Cover extends to roofs, cladding, floors, ceilings, stairs, internal walls and fixed partitions which are considered to be structural items for the purpose of the insurance.
- professional fees
- demolition and removal of debris
- dismantling moving, removing, storing, returning and re-erecting property belonging to the Insured
- costs of compliance with public authority