Quality and longevity have never been more central to construction than they are today, with increasing scrutiny over what is built and how. At the same time, the risks are higher than they have ever been. So too are the costs. 

Despite the best efforts of all involved, flaws or faults may arise long after a project’s completion, and these can be costly to rectify as well as significantly impacting property value and safety. With this in mind, a latent defects insurance (LDI) policy – also known as a structural or building warranty – should be purchased to protect property owners and developers.

Latent defects insurance

Any damages that arise during construction are usually insured under an “all risks” contract works insurance policy. This type of policy, however, does not cover latent defects and associated issues that arise post-construction (beyond any defects period the policy may have). For this reason, LDI is an appropriate route to go down.

LDI provides indemnity for issues with structure or waterproofing envelope resulting in physical loss or damage, as a result of a defect in design, materials or workmanship, and that are discovered post completion. Comprehensive cover ensures funds needed to rectify issues are provided promptly, and delays associated with liability and settlement are eliminated; minimising disruption and protecting investments. 

Buyers and investors are also increasingly demanding assurance against latent defects, which is where LDI comes to the fore. There are, however, lots of misconceptions about this type of policy:

Misconception: “Builders or developers are liable for as long as the policy period exists”

Reality: Although a LDI policy may offer coverage for a specific number of years — usually 10-12 years — a builder or developer is only liable for defects for up to 6 years. This timeframe is set out in section 14A of the Limitation Act 1980.

Misconception: “LDI only covers structural defects”

Reality: This depends on the policy details. LDI cover is usually extended to provide consequential damage to non-structural elements, and can be amended to cover mechanical and electrical defects.

Misconception: “Only poorly developed/built properties need latent defects cover”

Reality: Serious structural defects in well-built properties are rare, but ensuring that the property owner is protected just in case is important. Besides, most lenders require this before releasing any funds.

Misconception: “There is no warranty requirement for refurbishments or conversion projects”

Reality: Cover can, and should, be arranged for new buildings and conversions of existing buildings. In fact, many lenders specify a warranty for any project where structural work is taking place, and may refuse finance, even on projects where no structural work has taken place. 

Misconception: “Professional indemnity insurance will provide sufficient cover for latent defects”

Reality: Professional indemnity policies cover the insured party up to a fixed limit, which may be significantly less than the cost of repair works required for major developments. By comparison, LDI policies include annual indexation of the sum insured. This allows for any increases in construction costs over the policy term. 

Misconception: “LDI isn’t necessary when you have buildings insurance”

Reality: While buildings insurance protects against events such as fire, flood, and escape of water,  it doesn’t cover damage arising from an inherent or latent defect. 

Other insurance policies to consider include:

  • Public liability insurance — Protects against claims for injury or property damage during construction activities
  • Environmental liability insurance — Covers the cost of cleanup and restoration in the event of environmental contamination during construction
  • Construction plant insurance — Can cover damage or loss to plants, tools, equipment, site huts, and any other equipment

To discuss your insurance needs, please call 0121 803 3760 or email info@thebletchleygroup.com