Latent / Structural Defects Insurance
Latent Defects Insurance (often referred to as Structural or Inherent Defects 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-cancelable ten (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
Over the years, Rowlands & Hames have built a large portfolio containing examples of latent defects insurance claims ranging from building subsidence to water ingress.
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 Professional Indemnity. Should the owner of the property decide to sell the property within the period of the policy, it is transferable to the new owner and will be acceptable to the vast majority of mortgage lenders.
Types of buildings covered by latent defects insurance
Traditionally developers of commercial property have sought protection through Collateral Warranties, which are limited in their benefit as they rely on the continuous trading of the signatories as well as the continuing renewal of their Professional Indemnity policy. 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, occasionally up to several years after completion.
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.
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.
For residential properties which have been completed without a warranty having been arranged.
Self-build policies have been designed for individuals building their own homes and applies to both new and ‘conversions’.
How is Latent Defect Insurance Cover is Arranged?
For further information on arranging Latent Defects Insurance, including the Technical Audit, Policy Details and Basis of Settlement, please contact our Managing Director John Isles or read How to Arrange Latent Defect Insurance.
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 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-cancelable 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.
Latent Defects Insurance Quotations
For more information please contact:
John A Isles ACII