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What is Latent Defects insurance?

13 February 2023

Latent Defects insurance is becoming an important upfront consideration during the budgeting process for developers and funders in the construction industry to protect their project, business and reputation.

What is Latent Defects insurance?

The general purpose of Latent Defects policies is to provide protection should a property suffer damage to the structure or waterproofing envelope, caused by faults in the design, workmanship or materials, which were undiscovered at practical completion.

Does an ‘All Risks’ insurance policy provide protection against latent defects?

Damage arising from a latent defect is generally omitted from coverage available under both the traditional Construction and Operational All Risks insurance policies. Therefore, to fully protect the completed property, a Latent Defects insurance policy needs to be incepted after practical completion.

Why should a Latent Defects insurance solution be considered?

  • When contractors enter administration, it is unlikely that a Professional Indemnity policy will continue to offer any apparent protection and subsequently Collateral Warranties cannot be actioned without a Professional Indemnity Policy. This ‘insolvency protection’ is not the only benefit to Latent Defects insurance but in the current state of the construction industry, with up to 6,000 company insolvencies are expected in 2023 in the UK construction market, many view this as a key consideration in the purchase of Latent Defects insurance.
  • Latent Defects insurance is commonly requested by Funders/Tenants and by members of the Council of Mortgage Lenders. We are particularly finding this to be the case with Tenants when asked to sign up to a full repairing lease.
  • Costly and often lengthy legal action against the project team to rectify the damage issue will be mitigated through the inception of a policy.
  • The insurance cover is assignable to Future Owners and Tenants which, when considering selling your building or individual units, will be deemed a benefit for the prospective purchaser.
  • The policy can be taken out for up to 12 years and can be arranged pre, mid or post project construction. The Building Safety Act 2022 contains provisions requiring developers to provide a new homes warranty providing 15 years’ cover. In the coming year we are expecting updates from the Latent Defect insurance market as to their responses to this provision.

Almost any type of project could benefit from a Latent Defects policy, whether it be a residential or commercial scheme. Griffiths & Armour have successfully placed Latent Defects policies for a variety of projects including Queens Quarter in Croydon and the largest Amazon Warehouse in Europe for Bericote Properties.

The Griffiths & Armour construction team are well placed to discuss any queries you may have regarding Latent Defects insurance, so please get in touch.

Author

Emma Snelson

Emma Snelson

Head of Construction

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