Latent Defects Insurance

Latent Defects Insurance

Please note that Rowlands & Hames are only able to provide quotations on Commercial properties at this time.

Latent Defects Insurance (often referred to as Structural or Inherent Defects Insurance or even ‘Deccenial’ Insurance) provides a long-term warranty against a residential or commercial building’s defect in design, workmanship or materials. This is an effective alternative to collateral warranties and allows property owners to reduce their risk exposure.

What does Latent Defects insurance cover?

The main purpose of latent defects cover is to provide the owner of a new building with ‘peace of mind’.

Effectively, should their development/investment suffer from damage caused by a defect in design, workmanship or materials, then they have in place a first party generally non-cancellable 10 (or increasingly 12) year insurance policy to remedy that defect.

Latent Defects cover is for:

• structural defects
• ingress of water
• subsidence landslip or heave
• threat of imminent collapse requiring immediate remedial works to prevent damage caused by a defect in design workmanship or materials but not discovered before the inception of the cover

A latent defect warranty is an insurance policy which provides cover in the event of a defect occurring on the property. It does not rely on Architects Certificates or Collateral Warranties and the Professional Indemnity of others involved in the design and construction.

Should the owner of the property decide to sell the property within the period of the policy, it is assignable to the new owner and will be acceptable to the vast majority of lenders.

Types of buildings covered by latent defects insurance

Commercial Property

Traditionally developers of commercial property have sought protection through Collateral Warranties, which are limited in their benefit in that they rely on the continuous trading of those firms involved in the design and construction of the property and the continuing renewal of their respective Professional Indemnity policies.

The structural warranties are designed to transfer the risk of future defects to an insurer rather than being retained by the parties involved. Cover may also be provided on completed commercial property, often for several years after completion.

New Homes – Rowlands & Hames can assist routing your enquiry to another provider

New Homes policies have been created for developers working on residential developments and conversions including new build and mixed-use developments. The most common insurer is NHBC but there are several alternatives acceptable to mortgage lenders.

Social Housing – Rowlands & Hames can assist routing your enquiry to another provider

Specifically created for Housing Associations and Registered Social Landlords, with up to 12 years cover on residential developments and conversion projects. At least one insurer includes a ‘Right to Acquire’ facility which provides tenants who decide to purchase their property within the first five years of occupancy with a new ten-year warranty which in effect provides up to 15 years of cover.

Completed Housing – Rowlands & Hames can assist routing your enquiry to another provider

For residential properties which have been completed without a warranty having been arranged.

Self Build – Rowlands & Hames can assist routing your enquiry to another provider

Self-build policies have been designed for individuals building their own homes and applies to both new and ‘conversions’.

Arranging Latent Defects Insurance

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

1. A) The proposer
2. B) The new building
3. 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.

Cover includes:

• 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

Optional Covers

Consequential Loss (Business Interruption) Cover

Cover can be arranged for landlords or tenants of building for which a material damage latent defects cover is provided against:

• Loss of rent receivable
• Loss of income (gross profit or revenue)
• Removal expenses
• Increased cost of working from alternative premises
• The waterproofing envelope above and below ground
• Annual indexation of the sum insured and excess

At additional cost, a waiver of subrogation rights against named or all parties involved in the design and construction process (this no fault cover offers comfort to all those signing up to a partnering agreement and can help to prevent the need for potentially drawn-out and expensive litigation.)

Cover for buildings already under construction or recently completed

Phased cover and/or incorporation of existing/retained structures

Cover for non-structural components i.e. mechanical and electrical installations and component failure.

Other Benefits of Latent Defects Insurance

The cover is provided on a first-party material damage basis and therefore there is no requirement to prove that there was either fault or negligence on the part of a member of the professional team.

All that is required is to show that there is an inherent defect or damage as defined within the policy.

Thus, the insured should receive the funds to replace the building faster, regardless of blame, than would happen if he or she had to resort to costly and time-consuming litigation to prove that a professional party was responsible, which is needed before professional indemnity insurance can respond. Therefore, disruption is kept to a minimum.

Provided the sums insured are adequate, the insured should obtain a full recovery under the latent defects policy. This may not be the case if professional consultants or contractors do not have sufficient insurance or assets to enable a full recovery to be made. It therefore provides continuity regardless of the solvency of members of the professional team.

The cover is useful as a marketing tool and can be of a major benefit when negotiating a sale or a letting. The policy is freely assignable to both tenants and future purchasers.

It can reduce reliance on collateral warranties, guarantees and professional indemnity insurance provided by the professional team, although it should not be seen as a substitute for these.

It is non-cancellable for the period of cover.

In summary, Latent Defects Insurance can help to identify and manage both the construction and post-construction risks, thereby providing peace of mind to property developers, funders, future purchasers and tenants.

Claim Examples

The following list and images is not exhaustive but provides examples of the types of defects claimed under Structural Defects policy:

• Defectively designed floor slabs allowing movement and consequent damage to floors and walls
• Omission of wind posts allowing damage to the walls
• Subsidence causing damage to the wall
• Defective cladding allowing water to penetrate
• Failure of basement tanking allowing water to penetrate
• Defective roofing allowing water to penetrate
• Failure to rain screen allowing water to penetrate
• Poorly fitting windows allowing water to penetrate
• Water ingress damage
• Defective membranes
• Defective foundations
• Defective flooring
• Defective roof fixing bolts
• Defective floor supports

Latent Defects Insurance Quotations

Please note that Rowlands & Hames are only able to provide quotations for Commercial risks.

We may be able to suggest a route for any private dwelling house enquiries.

Policy limits and exclusions may apply, please see policy wording for full terms and conditions.