What is Latent Defect Insurance?
Latent defect insurance (LDI) is part of a suite of structural warranty insurance products that provide financial protection for the years following a building’s completion, covering any structural problems that occur due to failings in the building’s construction.
The core insurance product for any structural warranty, latent defect insurance is important for everyone involved in the early stages of a building’s life - the builders, the buyers, and the lenders providing the funding for both construction and sale.
Latent defects - which means faults in the construction that are not apparent at the time of the building’s construction or completion - may occur for several reasons, including:
- Substandard materials - Budgets are a key factor in building construction and sometimes the chosen materials are not as strong or effective as expected.
- Poor workmanship - Mistakes can be made and if these are not discovered during the build, then issues can arise later. LDI is perfectly positioned to cover the costs that arise from unintentional poor workmanship.
- Design flaws - Sometimes the issue lies with the original plans for the building; problems that are not evident until months or even years after the building has been finished. Here, LDI provides a safeguard.
Latent Defect Insurance vs. Standard Buildings Insurance
Latent defect insurance exists in a similar space to standard buildings insurance, though the two products rarely cross over.
Buildings insurance is in place to provide financial support should an external factor occur that causes damage to the building. Often, this is in terms of a natural disaster, such as flooding; or accidental damage, such as may be caused by a fire.
In contrast, LDI provides protection for issues that have come about due to a problem during the construction phase of the building’s lifespan. For example, a wall crumbling due to inadequate damp protection from the outset, or a roof leaking because the protection has been poorly fitted.
LDI forms part of a structural warranty typically tied to the building itself, and thus passes from the construction company to the homeowner upon an initial sale (and in subsequent sales).
Some problems, such as subsidence, can require investigation into their cause to determine if the correct claim should be made to the standard buildings insurer or the LDI provider.
Latent Defect Insurance and Cutting Corners
LDI is not a safety net for construction firms looking to cut corners.
The terms of the insurance policy will clearly state that payments will be made only if the faults were by no means deliberate and, if necessary, an investigation will take place to assess the veracity of any claim.
Part of the process of obtaining latent defect insurance involves regular site checks and building inspections by a qualified inspector on behalf of the insurance company.
These inspections:
- Make sure that the materials used are appropriate.
- Ensure that all workers are properly qualified and undertaking tasks to which they are suited.
- Check that all relevant standards are being met.
- Provide confidence to developers and funders.
If the inspector reports a problem during these inspections, then any issues must be resolved in order to obtain the structural warranty and LDI.
The point of latent defect insurance is to provide security against problems that were hidden at the time of construction and the inspections are key to minimising (and negating) any potential flaws. It does not cover negligence or a deliberate breach of building standards.
The Importance of Latent Defect Insurance
Latent defect insurance provides stability and guarantees for projects that typically have considerable financial backing - and comparable financial consequences should they fail.
With lending, investment, and security all key considerations for the multiple parties involved, LDI has long been proven to be a core component in building construction.
- Direct expense - Latent defects are, by definition, flaws that are hidden at the time of construction and remain undetected for months or years after the building is first in use. The cost of making the necessary repairs can be extremely expensive and disruptive. Having the financial backing of comprehensive latent defect insurance is cost-effective and provides an essential safeguard.
- Legal Problems - Considering the direct costs involved in repairing defects, without LDI, companies and individuals are all keen to avoid responsibility. The legal ramifications of determining responsibility and assigning costs appropriately can be both extremely costly and time-consuming, with legal disputes likely to last years with buildings often unusable until the situation is resolved.
- Maintaining Property Value - A building lacking any structural warranty and LDI is a far greater risk to any potential buyer; risk that will be reflected in the overall value of the property. By having comprehensive latent defect insurance, developers and building owners are able to ensure the property holds the maximum value.
- Securing Mortgages and Development Funding - Many lenders are unwilling to secure funding on new-builds that lack LDI, seeing it as an undesirable risk. New-build mortgages and development-level finance solutions all look to latent defect insurance as part of their risk management and will not provide funding without it.
LDI transfers the burden of structural risk from the developer or owner to the third-party insurer, providing peace of mind and a stable financial risk profile.
Who Needs Latent Defect Insurance?
Latent defect insurance is obtained by the builder or developer to provide a financial security and lower risk during the project build and the first decade of the building’s use. However, it is not just a product designed for new builds and independent developments.
In addition to home property developers and self-builders, LDI is a core product for:
- Commercial property development - Office buildings, retail, and industrial spaces also require LDI, and companies looking to build these commercial spaces must consider structural warranties in a similar way to homeowners.
- Refurbishment projects - Substantial additions or alterations to an existing building can also benefit from LDI. Extensions that involve new structural work may also suffer from hidden flaws in their construction and homeowners (or commercial property owners) looking to expand, convert, or refurbish buildings should request LDI as part of the builder’s package.
- Housing Associations - Large scale, multiple property build projects require LDI to provide the financial security that enables smooth management of larger tenanted developments.
- Investors - Any investor looking to provide capital for a building or refurbishment project can protect their investment through comprehensive LDI, which should be obtained either by the construction firm or as a direct addition.
Apply for Latent Defect Insurance
Keeping the costs down while getting LDI with a trusted and reliable provider can be difficult - thankfully, Clifton Private Finance are here to help.
Comprehensive latent defect insurance is essential for your development projects. Speak to Clifton Private Finance today to find out how we can help you get the very best tailored LDI solution for your construction.
