Contractor insolvency poses a significant risk to constructions projects, especially in relation to latent defects insurance (LDI), also known as structural warranty insurance. Latent defects are issues that are not immediately visible at the time of practical completion but become apparent later, such as foundational problems, water ingress, or structural instability. These defects can surface years after project handover, leading to substantial repair costs.
LDI provides first-party coverage for structural defects over a typical period of 10-12 years post completion. Insolvency of the main contractor eliminates the key line of defence against latent defects. Even with collateral warranties in place, enforcement against an insolvent entity is rarely viable.
Impact of contractor insolvency
- Enhanced Relevance of LDI: One of the primary advantages of LDI is that it is a ‘no-fault’ insurance product—claimants do not need to prove negligence. In cases where the contractor becomes insolvent, LDI provides a direct route to compensation for latent structural defects without the need for litigation or relying on collateral warranties.
- Underwriting Concerns: Insurers assess contractor solvency as part of their risk underwriting. An insolvency event, especially before project completion, may affect the ability to obtain or maintain LDI ultimately leading to higher premiums or exclusions.
- Coverage Limitations: Some LDI policies may include exclusions or reduced coverage if the contractor becomes insolvent during the defects liability period. Policy wordings should be carefully reviewed to understand how insolvency impacts claims eligibility.
- Claims Processing: In the event of insolvency, insurers may scrutinise claims more closely, particularly to ensure the defect falls within the scope of the policy and was not due to known or reported issues during construction.
There are now more tools available to access financial risk assessments on contractors when completing due diligence with insurer credit rating systems also enabling better access to the financials of main contractors and key subcontractors, assisting you to better assess the risk of default. We would welcome discussions to introduce these to you.
Contractor insolvency presents a significant risk in the construction sector, with the potential to undermine project delivery, increase costs, and leave property owners exposed to unremedied defects. In this context, LDI serves as a critical safeguard. Unlike traditional legal remedies, which may become practically unenforceable when a contractor collapses, LDI offers a direct and independent route to financial protection. It eliminates the need to establish liability or pursue a now-defunct entity through the courts, providing a much faster and more certain path to resolution and repair.
For these reasons, stakeholders should not view LDI as an add-on but as a foundational component of a well-rounded risk transfer strategy. Thoughtful procurement of insurance, backed by strong underwriting and attention to contractor due diligence, is essential to ensuring that projects remain resilient and insurable, regardless of the financial health of the construction supply chain.
If you would like further details on construction insurance or wish to discuss the benefits of Latent Defects Insurance, please get in touch.
