Building Users' Insurance Against Latent Defects

In 1988, a report was produced by the Construction Industry Sector Group of the National Economic Development Council. The report was called Building Users' Insurance Against Latent Defects known by the acronym BUILD. The committee that produced the report consisted of distinguished architects, engineers, contractors, property developers, insurers and representatives of government, under the chairmanship of Professor Donald Bishop.

The report contained an analysis of the risks of building development to the parties involved in it. Among the many points that arose from this report was the recommendation that there should be 'BUILD insurance'.

The essence of such insurance was that it should provide protection for a period of ten years, from the date of practical completion, on the basis that the insurance was a non-cancellable material damage policy against specified latent defects and damage. It was suggested that the cover initially would be limited to the structure, including foundations, the weather shield envelope and, optionally, loss of rent.

The policy was to be taken out by the developer at a very preliminary stage, at least before any work started on the site. The policy would be transferable to successive owners and to tenants of the whole building; in a situation where the whole building was not let to one tenant, the report envisaged that such tenants would be indemnified by the landlord on a back to back basis with the terms of the BUILD policy held by the landlord.

There would be a single premium to cover insurance and the necessary risk assessment and verification of the design and construction by independent consultants appointed by the insurer. There was to be provision for inflation in building costs in respect of the cover, and realistic deductibles (excess).

A further recommendation of the report was that insurers should waive their rights of subrogation without which, insurers would not be in a position to seek to recover their outlay from the party liable to the developer: for example, the architect, the engineer and/or the contractor. At the time of publication of the report this aspect was of considerable concern to insurers because it would create, in effect, a no fault insurance scheme.

There were three underwriters in the market: Allianz, Norman and SCOR. They were joined by Sun Alliance and Commercial Union in 1989. The indication in BUILD of the premium, including the verification costs, was that they would be of the order of 1.3% to 1.7% of the rebuilding cost. Although a small percentage, the cost in money terms looked substantial; for example, on a £10 million rebuilding cost, the premium would be of the order of £150,000. In addition, there were the fees and expenses of independent design checkers to be paid for.

Some developers considered the level of premium, and other fees, a high cost to pay when they were in a position to obtain tenants who were prepared to take the risk on full repairing covenants, with collateral warranties, all free of cost to the developer.

On the other hand, if the developer came to sell the building, the fact that there was such insurance might have enabled a better price to be achieved, or alternatively, a sale to be achieved which might not be achieved in the absence of the cover.

Furthermore, in times of over-supply of commercial buildings in the market place, it was conceivable that tenants may be more attracted to buildings with such cover than buildings without the cover.