Commercial Latent Defect cover represents potentially one of the fastest growing areas within construction insurance. With the global pandemic hitting investors and funders hard, it has also laid plain the fragility of many SME businesses that are relied on as crucial parts of the construction industry. These businesses, already under strain from narrow margins and tight deadlines, have also over the last two years had to contend with huge rises in the cost of PI insurance, and in many cases restrictions in the cover and limits that are available to them.
The upshot of this situation is that the traditional approach of using collateral warranties to protect clients and funders from structural issues, is now outdated and can leave them exposed not only to structural defects but also the loss of rent and use of assets within in their portfolios depriving them the returns one which they survive.
Traditionally, collateral warranties would be offered as a way of guaranteeing the work of a contractor. The warranties, backed with the contractors PI cover, would stand ready to respond in the event of any fault with the work that has been undertaken. There have always been problems with this: Will the contractor accept responsibility? Can I prove that it is specifically their element of work that is at fault? Will their PI cover be enough to rectify the claim? Now there is the very real question: Will the contractor be around to claim against? Many cases where a collateral warranty is called in end up in long and complex legal battle that can run on for years, and even with a successful judgment could just as easily put the contractor out of business and leave the costs of the case and repairs for the client to bear.
Commercial Latent Defects cover provides a first party insurance solution to this situation. In the event of a legitimate claim, the insurer will settle directly with the client without the need to prove negligence of the contractor. In addition to this, cover for loss of rent/use can also be included with the policy, so that the client is not out of pocket as a result of the issues. The below table highlights some of the key differences and benefits of Latent Defect Insurance when compared against collateral warranties.
| Particulars | Collateral Warranties | Commercial LDI |
|---|---|---|
| Negligence | Requires negligence of the third party to be proven. This can be a lengthy and expensive proposition whilst, all the while the asset sits unusable. | The policy operates on a first party basis and will settle legitimate claims to the policy holder before possibly looking to subrogate against a contractor. |
| Insolvency | Should the contractor or consultant become insolvent post-completion, any costs for repair will need to be borne by the owner. | Insolvency is not an issue, and the insurer will meet the rectification costs. |
| PI Insurance | PI insurance becomes invalid in the event of insolvency. | There is no need for Professional Indemnity insurance to be in place . |
| Transferability | Usually assignable only once notice has been given. | Fully assignable for an unlimited number of times throughout the lifetime of the policy. |
| Loss of Rent Cover | Unable to assist in this situation. | The policy can cover a period of lost rental income or cause as a result of a structural defect . |
Premiums are rated against the reinstatement cost of the structure and set at the outset of the projects construction. Throughout the construction phase, surveyors appointed by the insurers will audit the works providing reports and highlighting any issues that arise in the works. This is yet another benefit for clients.London Belgravia have made a name for ourselves in the LDI and Building Warranty market as an independent and impartial specialist in both the Residential and Commercial fields. We already work with a large network of introducing brokers across the UK and internationally, offering wholesale insurance and advice. We continue to grow our network and I invite you to get in touch for more information on both commercial and residential LDI and to discuss where we can work together to bring this solution to your clients.
About London Belgravia Brokers
London Belgravia have made a name for themselves in the LDI and Building Warranty market as an independent and impartial specialist in both the Residential and Commercial fields. We already work with a large network of introducing brokers across the UK and internationally, offering wholesale insurance and advice.