Key Points of Latent Defects Insurance

What Is Latent Defects Insurance?

Hidden defects in a newly-built property will usually not stay hidden for very long, which is why it is essential for contractors of these buildings to protect their companies against any potential claim that might one day, arise.

LDI (latent defects insurance) can be used to cover the costs of reinstating or repairing newly-built properties or homes, or any new work to an existing building where physical damage or loss has occurred due to inherent defects in the materials, workmanship, or design.

Damages that arise from latent defects are usually excluded from the coverage under the “all risks” property-insurance policies. This means they might not have coverage from the stage when a project is handed over to property insurance. Today, tenants have started to request more frequently that there are latent defect policies before they will sign a lease since they are unwilling to assume the risks linked to building defects.

Latent defects insurance is a policy designed to provide protection against any financial implications that can arise from hidden defects that become apparent at a later stage. This type of insurance often provides a high-performance, cost-effective alternative when compared to the collateral warranties that span a vast range of commercial, mixed, and residential new builds.

What Do Latent Defects Policies Include?

These policies cover a scheme-reinstatement cost, which includes professional fees, when damages arise due to one or more inherent defects, the risk of an imminent collapse, heave or landslide (only when caused by inherent defects), subsidence, or the ingress of water (excluded in the first 12 months). It often also includes demolishing, debris removal, dismantling, shoring a property up, resultant damage that occurs to any non-structural elements, and having to temporarily remove the contents of the property.

Additional covers, including damage to electrical and mechanical services, waiver of subrogation, or rent loss, is also made available.

What Are The Main Benefits Of Cover?

• First Party Policy: Cover that is designed to remedy damages without the requirement of “proof of negligence”. The professional indemnity insurance of contractors usually depends on negligence and this can be a complex task to prove, while these policies might not provide coverage for materials or poor workmanship. Collateral warranties that the contractor provides might also have the requirement of “proof of negligence”.
• Freely Assignable Policy: These policies can easily be passed over or assigned to a future tenant, owner, or funder. The policy can also pass over to a purchaser to assist with the process of securing a sale or lease.
• Fast Resolution In The Events Of Major Damage: The response of claims only relies on proof that there is damage, which enables minimized loss when it comes to business interruption and enjoyment and a proactive reinstatement.
• Contractor Insolvency: Beneficiaries of these policies can gain peace of mind knowing that the insurance is not affected by “contractor insolvency“. The cover will remain active for 10 to 12 years, and there is no requirement to renew the policy annually.

Latent defects insurance is available for mixed-used developments and commercial new builds (which includes significant extensions and conversions), where cover will be a requirement for residential and commercial aspects. In these cases, latent defects insurance policies will be provided, alongside a UK Finance Mortgage Lender Compliant Warranty.

When Should You Arrange Cover?

A latent defects policy should be taken out before construction starts so that the insurer can conduct a comprehensive technical audit throughout the entire construction period. Cover can be arranged after construction has commenced, but there may be a few exclusions and the costs of the cover might increase (in association with how far the work has progressed).

Technical Audit Fees And The Premium

Technical audit fees and a nominal deposit for the premium (typically 5-10%) will be taken once the formal terms have been accepted, while the balance of this premium will become due at “practical” completion. The pre-agreed rate of the premium before construction starts is then applied to the property’s reinstatement value at “practical” completion. This will generate a “final’ premium payable. Proposers can choose larger policy deductibles (in exchange for a reduction in the premium).

A technical audit inspection is performed so that an insurer can monitor a build to make sure the property is at appropriate standards and complies with any building regulations. If, at the stage of “practical completion” a technical auditor is happy that outstanding problems that may have occurred during construction were resolved and the build is matching specification, a certificate of approval will be issued to the insurer so that coverage will be provided.