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Importance of appropriate latent defects insurance

1st November 2011

Unfortunately there’s no getting away from it, the construction sector is going through a tough time and has been for a number of years. There are positive signs for the future, with many big projects being backed by the Government, but construction firms are still feeling the effects of the recession.

Recent statistics from the Insolvency Service has indicated that construction firm insolvency is up 22 per cent year-on-year which also has huge consequences for commercial property owners, who are potentially losing tens of thousands of pounds because of lack of appropriate insurance cover.At Rowlands and Hames, we have seen a 50 per cent 12-month increase on developers and purchasers of commercial property signing up for latent defect insurance, but still only 10 per cent of new property purchases are fully covered.

Latent defect insurance is taken out to cover new-build and premises up to three years old in the event of an inherent defect in the design, workmanship or materials becoming apparent after completion.

We have seen some really severe cases recently, of property owners left with a bill well into six figures, just because they didn’t get the correct cover and the builders or architects have since gone bust and there’s no current professional indemnity cover to claim against. With the increase of insolvencies, every new-build property owner is at risk, particular with builders under increased pressure to keep costs down.

It’s a big mistake for any commercial property developer to begin work or purchaser, or long-term leaseholder, to complete without latent defect insurance. They are exposing themselves to the very real risk of having a huge bill put in front of them with no where to turn but to pay it. Even the most optimistic predications for the construction sector outline difficult times ahead so more construction and architect firms going bust is a very distinct probability.

Latent defects insurance is a ‘first-party’ policy allowing the owner or leaseholder at the time of the defect discovery to claim on their own policy, not relying on a third party’s cover, and have repairs undertaken without having to trace the construction firms involved. Policies are automatically assigned to any new owner or lease-holder throughout the 10 or 12 year policy period.

Commercial developers, property owners and their solicitors in the UK have historically relied on the usual collateral warranties, between themselves and the architects, engineers and other construction firms, holding them responsible for any defects in the first 6 to 12 years after construction.

This is only appropriate if the architect or construction firm involved is traceable and still trading when the defect arises, while also having sufficiently valid professional indemnity insurance.

Any professional indemnity policy against which they wish to claim must be in force when claiming, unlikely in the event of a business that has ceased trading. That’s why it’s vital to have appropriate cover and people that don’t are in real danger of being hit which substantial charges if things go wrong.

John Isles
Managing Director
Rowlands and Hames

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