Latent defects are a primary concern for project owners and developers, as they can result in significant financial loss to what would have been hoped to be a completed structure. Miller’s Jon Burke explains how including latent defects insurance into your project insurances can pay dividends if issues were to arise.

What is latent defects insurance?

Latent (inherent) defects insurance, also known as Structural Warranty or Building Warranty, is an insurance policy that provides indemnity for structural damage to an insured property discovered post completion, but as a result of a defect in design, material or workmanship during construction. The damage may also occur after the defects liability or defects rectification period under the contract for the works has expired.

The policy can provide cover for a period of 10-12 years post completion of the contract works. It’s also important to note that damage as a result of defects during construction is often excluded from a property damage policy. A latent defects policy, therefore, can plug this potential gap in coverage.

How does latent defects insurance work?

Latent defects insurance operates as a first-party policy, which means that once damage has been identified as a result of an insured defect, insurers will provide an indemnity to rectify that damage.  This avoids the property owner having to rectify the damage using their own balance sheet and then seeking reimbursement via legal action against a negligent third party, which can often involve lengthy and costly legal proceedings.

What are the key benefits of latent defects insurance?

  1. Costs of complete or partial rebuild/rectification work (including debris removal) following physical damage, or the threat of imminent collapse to the insured premises, as a result of a defect in the design, material or workmanship are covered.
  2. Costs of repairing, replacing or rectifying any part of the waterproof envelope as a result of the ingress of water caused by a defect in the design, material or workmanship, or components of the waterproofing elements are covered.
  3. Loss of revenue or additional costs (e.g. alternative accommodation) as a result of an insured defect can be added to the base policy.
  4. Physical damage to mechanical and electrical services caused by a defect within the mechanical and electrical services arising from faulty or defective design, material or workmanship can be added to the base policy.
  5. The policy is transferable between successors in title if the owner sells the structure.

Would latent defects not be covered under a professional indemnity policy? 

It is commonly presumed that loss or damage caused by defects would be recoverable via the professional indemnity (PI) policy of the responsible party (e.g. contractor, designer, architect). However, in addition to the lengthy legal proceedings identified above, the limit of liability purchased by the responsible party may not be sufficient. Often the professional indemnity limit procured is far less than the reinstatement value of the structure.

On top of that, PI is on a ‘claims made’ policy basis, meaning that the policy in place at the time a claim is made is the policy to respond, not the policy in place when the works were undertaken. It’s therefore important to consider whether the responsible party would still be trading in 10-12 years’ time. If the party is no longer trading at the point a claim is made, there may not be a professional indemnity policy in place to claim against.

Here to help

Whether your development is commercial or residential, including latent defects cover as part of your insurance programme is essential. Our team of construction specialists are here to help.