Written by: Griffiths & Armour on: 14 Dec 2022
The Current Latent Defects Insurance Market and Challenges expected for 2023
Latent Defects insurance is ever changing and becoming much more of an upfront consideration during the budgeting process than it has been, when previously it was often seen as an afterthought.
To provide insight into Latent Defects insurance, we caught up with Joe Gooden from BuildZone, a leading residential Latent Defect policy provider, have commented on the current state of the inherent defect and building warranty market, which remains turbulent.
What is Latent Defects insurance (LDI) ?
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.
What challenges have developers faced when trying to secure LDI?
In the UK, there has been a vast change in the industry over the past five years with numerous un-rated insurers going into liquidation such as Alpha Insurance A/S and Elite Insurance Company Limited, plus reputable A-rated carriers including AmTrust International, Canopius and Ergo all exiting the market and realigning their strategies, focusing their appetite in different areas.
This resulted in many providers not being able to offer Developers a solution, or at least a financially stable, A-rated one.
Coupled with the above, the industry has also had to deal with the effects of the Covid-19 pandemic, potential impending recession, the ongoing effects of Grenfell-style cladding remediations, as well as the introduction of the Building Safety Act 2022 and rise in interest rates and inflation.
The introduction of the New Homes Quality Board (NHQB) and New Homes Ombudsman Service (NHOS) will add further change, with the framework due to be introduced at some point in the coming months.
One matter that has been suggested is the requirement to make any new residential ‘warranties’ have a minimum term of 15 years, up from the current 10 and discussions are ongoing with the Government and warranty providers as to how this may work.
Also, an issue with offshore insurers is that many are not authorised/regulated by the financial regulator in the UK and will not provide any protection to homeowners via the Financial Services Compensation Scheme, meaning they may be out of pocket and with a void policy should the insurer go into administration.
Will inflation impact LDI policies?
One of insurers biggest concerns at the moment lies around inflation and the impacts it could have on reinstatement and materials costs if there was a loss. All Policies have a maximum inflation cap, typically 5% p.a., so it is imperative that the final reinstatement figure you provide at practical completion is accurate and reflective of the reinstatement costs at the time and that these are then kept under constant review to counter the impact of inflation. Like traditional property insurance policies a Latent Defects policy will include an Average Condition so any under estimate in the sum insured can have a significant financial impact on any claim.
In the Build-to-Rent sector, many Developers and Funders are seeking a UK finance approved policy, rather than the traditional commercial Latent Defects insurance policy coverage in order to futureproof the development and ensure that if their approach changes post completion and they elect to sell some or all of the apartments, they would have a policy that would be suitable. However, there is a more restricted market in this space which may impact on the policy terms.
Another point to make sure of is that your policy does not have a financial limit, or if it does, that all parties are fully aware of it. Some providers have an inner limit, say £25m, so on a £100m project you are buying a policy that only actually covers 25% of the total reinstatement cost.
If you have any questions about the contents of this article or would like to discuss your requirements, please get in touch with Construction Insurance Broker, Gina Charles by clicking the button below.