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Providing long term protection for inherent defect risks

Marsh explores insurance solutions for inherent defects in buildings

Posted by Stephanie Broad | April 13, 2016 | People, policy, politics, money

During the construction phase of a building, loss or damage to the works is normally insured under an ‘all risks’ contract works insurance policy, which provides funds for the repair or damage. 

Following completion of construction, a property ‘all risks’ policy is usually arranged, although this policy normally provides no protection for damage arising out of an inherent or latent defect in the building. Because of this exclusion in traditional property damage insurance policies, a building owner or tenant may be faced with serious problems upon discovering a defect in their building. These problems may be aggravated if the building cannot be used and funds will need to be made available to meet the cost of repairing the damage and making the building stable. 

Whilst contractors and designers are expected to carry professional indemnity insurance, making a recovery can be difficult and time consuming, assuming of course that the responsible party is still in business and able to respond. The reality, sadly, is that it may be impossible to recover the cost of remedial work from any other party. 

Insurance against inherent defects in buildings is designed to overcome these problems. It is an insurance that covers the cost of repairing a building should an inherent defect in the structural works (deemed to be the load bearing structures, external walls and roofing) cause damage, or threaten imminent collapse, during a period of up to 10 or 12 years following practical completion of construction.

There are several features of the insurance that may be of benefit, which are as follows: 

  • It is a ‘first party pay’ policy – insurers will meet a legitimate claim before seeking to establish responsibility for causing the defect, offering speedy reinstatement and avoidance of the legislation process.
  • Policy periods are usually 10 or 12 years from the date of practical completion.
  • Once a policy has been issued, it is non-cancellable. 

The key advantages are: 

  • There will be no requirement on the policyholder to establish fault, negligence or liability of the party(ies) to the construction contract.
  • Costly, burdensome and time consuming litigation does not need to take place before repairs can be carried out, which enables the structure to be returned to use speedily and with the minimum of interruption.
  • The policy is assignable to future owners and/or tenants of the building who, in current market conditions, are increasingly reluctant to assume the risks associated with building defects and are likely to be more attracted to a building where latent defects insurance has been arranged as opposed to one where this protection does not exist. 

The typical claims which trigger this policy involve the following:

  • Deficient weatherproofing/waterproofing as a result of defective cladding/walls, badly-fitting windows, defective roofing and inadequate basement/underground lining allowing seepage.
  • Subsidence which can cause severe damage to structural elements of the building such as walls, floors, pillars, and beams.
  • Defectively designed or defective installation of floor slabs which can cause movement and/or cracking.

For more information, please contact:
Rahul Sharma, Construction & Real Estate Practice, Marsh Ltd
Tel: +44 (0)20 7357 2966
Mob: +44 (0)75 8580 3786

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