The discovery of a defect that arises in a building post-completion due to the design, workmanship or materials used for the build can be a considerable headache for any commercial property owner or tenant.
Over the last ten years, common market practice in the UK has been to take out a collateral warranty from the contractor. This aims to make good of any defect that might arise post-completion and hold the contractor accountable for their work. Unfortunately, this method can have its difficulties.
Firstly and most pertinent is what happens in the event that the contractor giving the collateral warranty becomes insolvent. At this point, it is likely that the collateral warranty provided by the contractor becomes nullified as the party is unable to honor the terms listed in the collateral warranty, and their PI insurance is likely to have been terminated.
Secondly, as a collateral warranty is not a first-party insurance product, developers will need to provide evidence of fault on the part of the contractor. If there is a dispute, the matter is often settled through the legal system, which can be expensive both in cost and time taken. All the while, the asset can be potentially sitting unusable by either the owner or the tenant.
Both of the above points can potentially have a dramatic effect on a company’s balance sheet without warning.
Latent defects insurance is often used as a tool to protect against unanticipated shockwaves to the balance sheet after completion.
This is done through the insurance being first-party, so it will make good of the defect and then look for negligence. Further to this, the insurance is still valid regardless of the contractors status of solvency.
Examples of Latent Defects in Construction:
- Defective basement tanking allowing water penetration
- Under-strength concrete or misplaced reinforcement allowing movement damage to the structure
- Inadequate foundations causing subsidence of the building
Head of construction insurance, Henry South adds, “Whilst collateral warranties still form a very important part of any contractual arrangement, latent defects insurance is an essential part of a robust risk management strategy for developers.”
At London Belgravia Brokers, will work with you to ensure that the exposure and risks faced by your business will be protected, leaving you with complete peace of mind.
If you have any questions regarding latent defects in the construction sector, please get in touch.