Latent Defects Insurance vs Collateral Warranties on Commercial Buildings
|Latent Defect Insurance||Collateral Warranties|
|✓ Freely Assignable|
✓ Insurance backed
✓ Full sum insured and index linked
|✖ Require proof of negligence|
✖ No guarantee of warrantor’s solvency
✖ Need to maintain high levels of PI for years
Most developers automatically think of obtaining structural warranty insurance when building a residential project, due to the requirement by UK law to have 10-year cover in place when the property comes to be sold – generally, to a private individual needing a mortgage.
What are the options for commercial projects?
Latent Defect Insurance
Latent defect insurance (LDI) provides commercial or industrial properties with protection against damage caused by a defect in design, workmanship, or materials, caused during the construction phase.
There is no legal requirement for commercial properties to have latent defect insurance. However, we do advise this cover is sought to protect the:
- Property owner
- Financial investor
Cover is provided against defects and water ingress for the loadbearing structure and waterproof envelope of the building.
LDI covers you should the property need to be prevented from collapse and any associated repair costs – right up to full dismantling and rebuilding, including the associated professional fees.
The cover sits with the property itself for 10 or 12 years and is freely assignable. Additional covers are available such as Mechanical and Electrical LDI, Business Interruption, and loss of rent.
As the policy is written for the benefit of the property – not any individual – any valid claim will respond without fault. It is also possible to waive the subrogation rights against the contractor and consultants for additional premium.
The alternative option – and a very commonly used approach – is to arrange a collateral warranty. This is typically between a contractor, sub-contractor or consultant and an interested third-party benefactor, giving them rights to sue the warrantor.
This can have pitfalls because Professional Indemnity insurance is written on a claims made basis and if cover is allowed to lapse, gaps can occur. The same problem applies if the warrantor becomes insolvent.
In the event of a defect, cashflow can be an issue because money is not available immediately to remedy the issue, with additional funds needed to pursue litigation. Add to this the concern that the legal challenge may not go the way you want, and this may not be the best cover for your needs.
Professional Indemnity insurance in the current climate is expensive, and the aggregate limits carried may not be enough. Even a claim on an each and every basis may not have the limits required if the defect remedy cost exceeds.
Is latent defect insurance right for you?
The upfront cost of latent defects insurance needs to be considered against the potential issues that can occur down the line. However, it offers a secure option for investors in creating a more saleable and leasable property. It attracts tenants because they feel protected, helping to assure occupancy.
Help is at hand – Get in touch today
We’ll take the time to understand your requirements and provide advice and assistance when building and protecting your commercial project. Call us on 01204 387111 or email Samantha on firstname.lastname@example.org