Latent Defect Insurance (“LDI”) is also referred to as Structural Warranty, Structural Guarantee and Inherent Defect insurance.
Our LDI solutions are designed to provide cover for the cost of the completion or partially re-building or rectification works to properties that have been affected by major (structural) damage due to design, workmanship or defective materials.
The LDI indemnifies policyholders against claims discovered within the insurance period (10 years). Whilst the construction industry remains very innovative with a significant emphasis on quality control, major building defects still occur far too frequently. This places the owners, funders and advisers of development projects at significant risk.
Further, buying a recently constructed properties (within the 10-year period) without the comfort and security provided under an LDI product is potentially having an adverse effect on onward sales. Indeed, most residential or commercial developments without comprehensive warranty arrangements in place will lead to a reduction in the sale price or limit those who are interested in such a purchase.
Professional certificates and collateral warranties do provide some protection, but this is limited in the event of major structural damage occurring, particularly when the risk of insolvency is factored into the equation.
These types of policies, broadly, provide the following coverage:
- 10 -12 years cover after practical completion
- Approved inspection regime
- For owners, funders/lenders or tenants
- Repair or re-instatement for newly built properties resulting from defective design, workmanship or materials
Further, when a mortgage is required, the lender usually insists upon a 10-year warranty being in place. The products that we source are therefore approved by the Council of Mortgage Lenders.
Structural Warranty Coverage
Structural warranty coverage providers vary significantly, in terms of their appetite to risk and the breadth of coverage offered. However, we can help using our selection process and assisting to select the right provider for the particular project, who may offer some of the following covers:
Structural Warranty
This provides coverage for structural issues (sometimes called Major Defects), or put another way, discovered issues or defects with the structural elements of the building after the defect liability period has expired.
Defects Insurance
Some structural warranty providers will include a defect period for the first two years (from practical completion) of cover. This cover may protect against non-structural matters/defects or technical non-compliance with the warranty provider’s manual.
Building Control Coverage
This coverage is intended to protect against non-compliance with Building Regulations that result in health or safety issues.
Deposit Protection
This cover protects the homeowner’s deposit in the event of developer insolvency during the building of the property.
Which Structural Warranty is right for you?
A structural warranty (also referred to as latent defect insurance) is an insurance product that insures the structural integrity of your new home.
This insurance product is usually taken out for a period of 10 years after completion of your new home, although longer periods are potentially available. In the usual course of events, a structural warranty is purchased by the builder of your new home, before construction begins.
However, it is intended to protect the new homeowner in the event of structural defects of the new home discovered within the first 10 years of practical completion of the new home.
Why is a new home warranty needed?
Structural warranties are not compulsory, but most mortgage lenders will require a structural warranty to be in place. In addition, you may have problems selling a home that is less than 10 years old without a structural warranty.
How does your new home warranty work?
Once the plans, specification and the application form for the structural warranty is made, the provider will consider the application and provide a quotation, or if further information is required, a request for additional information and a non-binding indication of premium.
The premium and surveying fees are calculated on the specifics of the particular building or development. If the quotation is accepted, the warranty provider will supply the policy documentation and a technical manual.
The construction begins and the site inspections are scheduled in line with the build stages to ensure compliance with the warranty standards (usually higher than Building Control standards). Once the construction phase is complete and certified the structural defects period then usually begins.
A structural warranty (or latent defect insurance) is an insurance product that covers discovered defects in the workmanship, design and/or materials used in the construction of your self-build property.
The warranty provider will check your plans (known as a technical audit) and then inspect the building of your property at various key stages once construction has begun.
If something goes fundamentally wrong with your construction phase it can be very expensive to remedy. Further, with a structural warranty policy in place it negates the need for you to potentially get into a dispute and/or chase up the architect or the builder to fix the problem.
What about a Professional Consultants’ Certificate (PCC)?
Not all contractors are able to, or are willing to, provide guarantees for their work, however, a PCC may be a viable alternative with the most common form of certificate being approved by the Council of Mortgage Lenders (CML). The PCC published by the can be relied upon both by the original purchaser of the property, subsequent purchasers and the lender for a period of 6 years from the date of the certificate. However, the wording should be checked carefully!
Clearly, with the PCC only lasting 6 years and a structural warranty product lasting between 10 and 12 years there is an obvious advantage in seeking the security of a structural warranty. However, the main advantage of a structural warranty over a PCC is accountability; the issue is whether you want to get into a discussion (and potential dispute) with the potentially ‘at fault’ party in order to establish what has gone wrong and, indeed, whether they are going to be around (or have the financial strength) to remedy the defects in the future. Choosing a structural warranty from an ‘A’ rated warranty provider will really offer the peace of mind you are looking for in this regard.
Importance of the technical audit process?
Before any structural warranty for your development can be issued it is essential that the warranty provider is confident that your works meet the required standards that activate the warranty.
The process requires a review of your construction plans together with a series of surveys to ensure that the property is built as drawn or specified.
As a result, the technical audit process starts well in advance of works on site being started. The series of surveys are carried out by the appointed surveyor at key stages during the course of the construction phase to ensure compliance with both building regulations and the requirements of the warranty’s technical manual standards.
After completion of the construction phase has been certified the warranty provider will review all relevant certification and issue the technical audit approval to Construction Shield to enable the issuing of your warranty.
As with standard structural warranty cover, the policy is deigned to cover the policyholder in the event of a structural issue arising from the design, workmanship or materials of your project.
Retrospective warranty coverage can be provided for the balance of the 10-year period from practical completion. This means that when you intend to sell your property, the prospective purchaser or mortgagor can rely on this insurance product to secure their investment.
Who is a retrospective warranty applicable to? Who should think about retrospective warranty protection?
Retrospective warranties (sometimes referred to as completed property warranties) are designed for residential properties that have been built or converted within the last 10 years without the benefit of a pre-existing structural warranty.
As the name suggests, this structural warranty policy is designed for property developers who intend to rent rather than sell their schemes.
The cover is intended to protect the developer, the contractor, the tenant as well as the investor from defects discovered after the construction phase of the scheme has been completed.
These policies can provide up to 12 years of protection for maintenance and budgeting costs.
How can a private rental warranty benefit my tenants?
With a new lease, a well-advised tenant will scrutinise any applicable repairing liabilities and may commission a survey. However, inspections may identify obvious defects or disrepair but they are unlikely to uncover latent defects that are attributable to the construction or refurbishment stage.
A tenant may be reluctant to meet the costs of remedying defects, especially if those works are expensive, they perceive little benefit to themselves or there is not service charge cap in place. A structural warranty for this eventuality may be the perfect answer to potential future problems
How does Developer Insolvency Cover work?
Cover is offered to return your deposit during the construction phase of the project in case of the developer’s fraud or inability to continue trading. In certain cases this cover can be extended to either pay for the costs of completing the building works or refund the deposit held by the developer.
Mix-use developments present their own challenges, however, Construction Shield can source the appropriate cover for developers who are involved with both residential and non-residential projects.
Such hybrid schemes are increasingly popular and such structural warranty policies to protect the property owner against the inherent structural defects not apparent during the construction phase of the development. The policy may also cover those defects discovered within the external car parking or roads within the scheme. Coverage is usually provided for up to 12 years from completion of the construction.
Machinery Inherent Defects insurance?
There are usually two types of situation that this additional protection is designed for, the first provides cover for the mechanical and electrical services operating at the site and the second is potentially available for any district heating system in use.
This product, like the structural warranty itself, provides ongoing risk management during the construction phase of the project through inspections and design assistance.
Commercial structural warranties (sometimes referred to as Latent Defects cover) are a first party insurance product that is an alternative for a collateral warranty.
The policy provides comprehensive cover for all types of developments, such as offices, warehouses, educational facilities and retail schemes.
With collateral warranties proving unreliable, a 10 or 12-year Commercial Structural Warranty policy from an ‘A’ rated insurer will provide much greater security and full risk transfer for the project. There are also potential additional covers that can be built into the policy to suit the project, such as Mechanical & Electrical cover.
Why is a commercial warranty important?
Commercial structural warranty insurance enables the safe sale or letting of the commercial properties as it transfers the risk of structural defects away from the owner or the landlord.
The warranty will enhance the value of the development too, as it will increase confidence with funders, sales and lettings.
Social Housing Warranty
The social housing (structural) warranty has been designed for housing associations, registered social landlords, developers and builders and is suitable for re-generation as well as mixed-use projects.
Whether for shared ownership or rental market purposes, long-term property owners can be exposed to inherent structural defects discovered a long time after the construction work has been completed. The social housing warranty is designed to protect against structural defects from poor workmanship, design or materials, and may cover contaminated land.