Mitigating the risks of latent defects

In 2021 we saw an increase in contractor insolvencies due to the lasting effects of Covid 19, the increased costs of raw materials and labour inflationary pressures that have been seen in the industry. Unfortunately, contractor insolvencies are still expected in 2022. January and February have already seen 12 insolvencies in the UK, for many developers and funders this highlights the need for projects to seriously consider a Latent Defect insurance solution.

Latent Defects insurance provides first party insurance protection to cover the cost of repairs if a structural defect is discovered in the building after practical completion.

Latent defects can be caused by a fault in the building’s design or construction, or by faulty materials. Latent Defects Insurance helps to protect your construction project, business and reputation.

• The trend of developers/funders and tenants relying solely on Professional Indemnity policies and collateral warranties of contractors/design consultants appears to be decreasing. 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, many view it as a key consideration in the purchase of type of insurance.
• Latent Defects is commonly requested by funders/tenants and by members of the Council of Mortgage Lenders. When a Latent Defects policy is not incepted, it can cause further issues for the project when potentially considering selling or letting the building. Most are now uncomfortable relying on collateral warranties that ultimately may offer little protection. We are finding this to be the case with tenants when asked to sign up to a full repairing lease.
• The policy is designed to provide cover for the structural defects in the building and extends to normally include water ingress. 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. Post purchase of Latent Defects insurance is more expensive and problematic so ideally we always recommend this cover is considered prior to the commencement of construction activities on site.

The importance of selecting an appropriate Latent Defect insurer cannot be overlooked. Almost any type of project could benefit from a Latent Defect policy whether it be a residential or commercial scheme.

The Griffiths & Armour construction team are well placed to discuss any queries you may have regarding Latent Defects insurance.

Construction Insurance Brokers, Gina Charles and Emma Snelson will be at MIPIM 2022 and welcome the opportunity to discuss any risk or insurance matters. If you would like to arrange a meeting, please click below or contact Gina or Emma on LinkedIn.

To provide insight into what to expect in 2022, our specialist team discussed trending topics in our recently released video What’s happening in the Construction Industry in 2022? that covers areas such as Sustainability in Construction and Timber Construction projects.