16 April 2025
Protecting Your Investment: Understanding Latent Defects Insurance for Building Projects
For owners and developers involved in large-scale building projects, Latent Defects Insurance (LDI) provides an essential layer of protection against unforeseen issues that may arise after construction. This article, the first in a series, highlights the key principles of LDI coverage and how it can safeguard long-term project investments.
Latent defects are issues that appear post-construction, going undetected during the project itself. LDI provides indemnity for newly completed building projects, offering coverage for up to 10 or 12 years. It covers the cost of reinstating property damaged by defects in design, workmanship, or materials.
The LDI market is niche and highly specialised, with only a small number of insurers actively trading. This is due to the extremely long-tail nature of the product, with insurers having to reserve for up to 12 years.
LDI provides indemnity for newly completed building projects, offering coverage for up to 10 or 12 years.
Key benefits
Post-completion property insurance specifically excludes latent defects.
Protection from contractor insolvency and/or if they cap their liability under contract.
Common for tenants to want the cover to be in place before agreeing to take space.
Investors are keen to protect their investment in the asset.
Robust and direct risk transfer as a first-party insurance policy responding to damage rather than being wholly reliant on contractual liabilities which could lead to disputes and delays.
The second set of eyes for the owner/developer due to the technical audit process.
Without LDI, the owner/developer would be solely reliant on pursuing the contractors via the collateral warranties and ultimately relying on the contractors' Professional Indemnity (PI) policy which operates on a third-party basis i.e. dependent on proving negligence.
Sales tool if owner/developer decides to sell the building, as policy is freely transferrable.
Procurement process and technical audit
LDI should be procured before the start of construction so that insurers can carry out their technical audit throughout the construction period.
The cost is agreed prior to the start of construction with a small deposit (typically 10% to 15%) payable alongside the technical audit fee upon works commencement / provisional policy placement.
Should the audit be successful, the owner/developer has the option to pay the balance of premium at practical completion. The rate agreed at the start of construction is applied to the actual reinstatement value of the property at practical completion, to generate the final premium payable.
Technical audits are carried out so that insurers can monitor the build to ensure it is of an appropriate standard and in compliance with building regulations.
Key underwriting metrics
Insurers will be keen to see that highly experienced contractors and engineers are being employed and will ultimately be reliant on the professional team to design the building. They will focus on the waterproofing strategy for the basement, the facade and roof, plus want to see the façade / external wall maintenance strategy.
Mechanical and electrical services
The core / structural LDI cover extends to include M&E services on a consequential basis, i.e. if there is a defect in the structure which leads to damage to the structure and then the adjacent M&E, the cover responds.
The standalone, additional M&E section covers inherent defects in M&E services which are damaged in isolation, i.e. free of any structural defect. This optional section provides extra protection in case the manufacturer/supplier/contractor becomes insolvent.
Loss of rent
Depending on the terms of the lease, tenants can benefit from a break in rent payments should a latent defect occur, therefore the optional Loss of Rent section may well be of interest.
A discussion should be had with your broker early on as the risk may in fact be the cost of sourcing alternative accommodation as opposed to loss of rent.
Looking ahead
In the next article in this series, we'll explore how Latent Defects Insurance (LDI) plays a crucial role in sustainable development, offering protection and support for environmentally conscious building projects.
The Gallagher Specialty Construction team has decades of experience in arranging and servicing LDI policies across a range of sectors, including commercial, mixed-use, and residential developments. For more details on how Latent Defects Insurance (LDI) can benefit your building projects or if there are any questions about coverage options, feel free to reach out.
Latent Defects Insurance and Sustainable Building Practices
As the construction industry continues to evolve with a stronger focus on sustainability, the need for comprehensive insurance coverage becomes even more crucial.
Hybrid Latent Defects Insurance and Housing Warranties
Building on our previous discussions about Latent Defects Insurance (LDI) and sustainable development, this final article in the series explores the evolving landscape of Housing Warranties and Hybrid Latent Defects Insurance in the UK.
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