Blog-11-09-Latent Defects

Commercial Building Warranties (Latent Defects Insurance)

September 2011

Whilst few people would purchase a newly built house without expecting the usual 10 year new building warranty, this can’t be said for the developers and ultimate owners of commercial properties if construction defects are discovered within the first 10 years to 12 years.

Commercial developers and property owners in the UK have historically relied on collateral warranties i.e. legal contracts between themselves and the architects, engineers and other construction firms, holding them responsible for any defects in the first six to twelve years after construction.

The problem being this presupposes the architect or construction firm involved will be traceable or indeed still trading when the defect arises and secondly that they have valid and adequate professional indemnity insurance. Professional Indemnity insurance triggers only at the time of the claim and so it is unlikely for there to be cover if the firm has gone bust in the interim.

With this in mind, property investors and long-term tenants, and their legal advisers, are moving away from reliance on collateral warranties and demanding a Latent Defects policy (also referred to as Structural Defects or Building Warranty Insurance)

A latent defects policy is a ‘first party’ policy allowing the owner at the time of the defect discovery to claim on their own policy, not relying on a third party’s cover, and have repairs undertaken without having to trace the construction firms involved. Policies are automatically assigned to any new owner or lease-holder throughout the 10 or 12 year policy period.

This does not stop the insurer from seeking to recover against the architect or builders under the terms of any collateral warranties, although in some circumstances where there is a close relationship between developer and owner it often pays to purchase a ‘subrogation waiver’ in respect of the building firm so the insurer doesn’t pursue them.

Premiums aren’t cheap as the risks are enormous for the insurer and will often be in the tens of thousands of pounds, with a significant deductible of between £10,000 and £25,000, but the demand for such policies are increasing and are expected to become the norm in years to come as the commercial construction sector picks-up.

For further information and quotations speak to John Isles 01253 598953 or john@rowlands-hames.co.uk

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