Construction insurance types

While this type of insurance has been available for many years, only a relatively small number of commercial projects are covered by latent defect insurance policies. This class of insurance traces its roots to the French market where decennale insurance is a legal requirement on all new buildings and works.

However, the UK legal system does not contain appropriate provisions for such cover to be a statutory requirement although the Latham Report urged that steps should be taken to change this.

In its simplest form, a latent defects policy provides cover in respect of actual material damage to a building in so far as this is caused by inherent or latent defects that originate within the structural elements thereof. The structural elements are usually defined as being:

• the foundations, columns, beams;
• the external walls and cladding, doors and windows;
• the stairs and floors;
• the roof structures; and
• any other external and internal load-bearing elements essential to the stability of the property.

Most insurers also include weatherproofing and waterproofing cover within the basic cover.

The policy is usually made in the name of the building owner/developer but is freely assignable to new owners, lessees or financiers. It can prove to be a useful sales or letting aid as well as an additional reassuring measure for a party sourcing a new building for its own operations.

Perhaps the single most important advantage of maintaining such cover becomes apparent when a latent defect manifests itself. Instead of having to commit considerable time and resource to establishing the party(ies) responsible, the insured has only to turn to the insurer to seek indemnity for rectification. The insurer will be the party who establishes responsibility and pursues recovery from those responsible by exercising its rights of subrogation.

Insurers are sometimes prepared to waive subrogation rights against architects, engineers, contractors and others (but not suppliers), on payment of an additional premium. It is difficult to see the justification for doing this.

An inherent defect is one that exists prior to the date of practical completion but that remains undiscovered at that date and manifests itself during the period of the policy. Policies are generally for 10 years from practical completion although some insurers will provide cover for 12 years. The inherent defect may be in the design, materials or workmanship.

Some insurers will agree to extend their policies to include such elements as the mechanical and electrical services within the building and also to include cover in respect of consequential losses incurred by the insured. These can involve loss of rental income resulting from the building being un-tenable, additional costs of working due to the need for the building’s occupants to move out while remedial works are carried out, etc.

Premium costs obviously vary dependent upon the scope of cover sought and the sum insured, etc. Although the premiums are often seen as being high, when looked at over a 10-year period they represent good value.

Part of the underwriting process for latent defects insurance is the carrying out of a technical audit by an appropriately qualified party appointed by insurers. The technical auditor will visit the site regularly during construction, monitoring both the design and the construction work, to identify irregularities or potential problems and ensure their rectification and to issue a certificate at practical completion confirming to insurers the insurability of the risk.

It is essential therefore, that any decision to consider latent defects insurance is taken before works commence. The technical audit fee is payable by the developer but there is no commitment to take out or pay for the cover until after practical completion. Indeed, some developers choose to purchase the technical audit service as an independent watchdog during the construction period and do not continue with the latent defects insurance upon completion.

It is worth repeating that latent defects insurance should be considered at a very early stage of the development so that decisions can be made before any on site work is commenced. Advice and clarification should be sought from an appropriately experienced and knowledgeable insurance professional to ensure that a suitable bespoke package is put together. There should also be a full understanding of the cover available and the cover being purchased.