InSite | What is Latent Defects Insurance?

What is Latent Defects Insurance?

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Latent defects insurance (LDI) is another term for structural warranty.


LDI provides cover in the event of an inherent defect in the design, workmanship, or materials becoming apparent in the structure or waterproofing envelope of a building, resulting in physical loss or damage.


It indemnifies the policyholder for the cost of repairs or replacement of damaged property and will pay to prevent imminent further damage caused by a defect up to the total sum insured. To make a claim, an insured party does not need to prove negligence. So if an insured defect arises in the building after completion, the policy should cover the cost of correcting the defect.


Cover can be arranged for new buildings and conversions of existing buildings.


The policy is generally available for a period of 10 to 12 years from completion.


Banks will often insist on LDI cover being present before offering mortgage loans to owners.


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How does LDI compare to available alternatives?


Collateral warranties


Collateral warranties are typically used in complex developments and commercial projects where there are multiple parties involved in construction.


It is a contract whereby a professional consultant or contractor warrants to a third party beneficiary, often the developer, purchaser, tenant or investor, that it has carried out services or works in accordance with a specified standard of care and skill.


Should a defect arise for which the warrantor is responsible, the third party beneficiary will have a contractual right to seek appropriate damages. Unlike LDI, it is for the beneficiary to prove the warrantor breached contractual requirements.


Collateral warranties often require a significant amount of additional preparation and paperwork to put in place, compared to LDI cover.


Even so, they may be specified ahead of LDI because the latter typically excludes cover for mechanical and electrical (M&E) equipment and economic loss, such as loss of rent.


Premier Guarantee’s LDI policies include M&E cover and loss of rent can be added to the cover.


A Professional Consultant’s Certificate


A Professional Consultant’s Certificate (PCC) demonstrates that your professional consultant has the necessary experience, professional indemnity insurance in place, and visited the site during construction to check on the progress of the build.


A PCC makes the professional consultant liable for 6 years, but it does not provide cover for structural defects.


With a PCC arrangement, the property owner or tenant needs to prove liability, which can be difficult, costly and time consuming, with no guarantee of a favourable outcome.


Again, if the consultant goes out of business, there may be little or no recourse available.


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Every care was taken to ensure the information in this article was correct at the time of publication (August 2022). Guidance provided does not replace the reader’s professional judgement and any construction project should comply with the relevant Building Regulations or applicable technical standards. For the most up to date Premier Guarantee technical guidance please refer to your Risk Management Surveyor and the latest version of the Premier Guarantee Technical Manual.

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