- Project plans
- Project activities
- Legislation and standards
- Industry context
Last edited 06 Feb 2018
Latent defects insurance
It is the nature of construction projects that faults and defects caused by failures in design, workmanship or materials, may not become apparent or readily detectable (even with the exercise of reasonable care) until many years after completion of the project, long after the end of the defects liability period. Such defects are known as latent defects. Latent defects can be extremely expensive and disruptive to rectify.
Latent defects insurance provides cover for new buildings (or new works to existing buildings) in the event that latent defects become apparent. Latent defects insurance is seen to provide more complete cover for defects than other methods, (such as collateral warranties) which may require proof of breach of contract. This can take considerable time, and can be subject to complications such as net contribution clauses and insolvencies.
Latent defects insurance was proposed in 1988 when the Construction Industry Sector Group of the National Economic Development Council published their report Building Users' Insurance Against Latent Defects. At the time, there was little take up, as the premium, was in the order of 1.3% to 1.7% of the rebuilding cost. So, for example, on a £10 million rebuilding cost, the premium would be of the order of £150,000. In addition, there were fees and expenses for independent design checkers.
However, there is now much more flexibility in the insurance market as to the range of available cover available. There are several insurers writing building defects type insurance and premiums are reducing. As a consequence, latent defects insurance is becoming more prevalent.
Cover will usually be provided for 8 to 12 years from the issue of the final certificate or certificate of practical completion (although longer policies are now available). Typically, the insurance provides cover, up to the full rebuild cost, for repairs and for work to prevent imminent damage.
Basic policies cover the structure and weatherproofing but this can be extended to include non-structural elements and mechanical and electrical services (such as heating, ventilating, air-conditioning, water systems, lifts, escalators, electrical distribution systems, building management systems, and so on), and some policies will provide cover for loss of rent, loss of profit or revenue, and the costs of working from alternative premises.
Premiums can either be payable annually, or through a single, one-off payment, and policies are generally freely assignable.
In addition to the premium, technical auditors will have to be paid for by the insured to check the design for insurers. There is, inevitably, an element of duplication of fees here in the sense that the building owner is paying professionals for the design and then paying other professionals to vet the design for insurers. However, it can be argued that this audit process is good for risk management of the design, workmanship, installation, choice of materials and testing.
The use of latent defects insurance does not mean the end of collateral warranties. Most lawyers take the view when advising developers and tenants, that collateral warranties are still needed to plug any gaps there may be in the extent of cover provided by latent defects insurance. Unlike claims for breach of contract, cover under latent defects insurance is limited to the maximum sum insured, and only certain specified losses are covered. In addition, policies may include an excess (sometimes around 1%).
 Find out more
 Related articles on Designing Buildings Wiki
Featured articles and news
Timo Hartmann of TU Berlin introduces a themed issue of the ICE Smart Infrastructure and Construction journal.
Freedom of Information request reveals that taxpayers are footing the bill for Carillion's collapse.
Driven piles are used to support buildings, walls and bridges, and can be the most cost-effective deep foundation solution.
Australian landmark celebrates achievement of carbon neutral status five years ahead of schedule.
Non-material amendments can sometimes be necessary after planning permission has been granted. Find out more here.
Six things civil engineers could do to ensure the success of projects.
Dublin housing crisis restricts employers' ability to recruit, according to new U+I research.
Intricate inlays and beautiful patterns can be created with waterjet cutting.
Two historic quarries in environmentally sensitive areas were reopened to repair Exeter Cathedral.
The phrase ‘time at large’ describes the situation where there is no date for completion, or it has become invalid.