Latent Defects Insurance covers new-builds, typically for a set period of eight to 12 years, for any inherent defects in the design, workmanship or materials that become apparent after a property’s completion. Normally the building is indemnified for its total value and for full repairs. The insurance extends to anyone with an interest in the property, such as the owner, developer or tenant.
NHBC
The National House Building Council provides LDI through its Buildmark Warranty, which is applied to new and converted homes in the UK. Not only does the NHBC issue warranties for around 80% of new homes, it also runs a continuous inspection programme with the aim of improving standards across ?the industry.
The NHBC Buildmark Warranty protects around 1.6m homes. Builders become NHBC-registered in order to offer the warranty, which provides cover of up to £25m for each development and £1m for each new dwelling.
The warranty is popular because the Council of Mortgage Lenders stipulates that mortgage finance can only be made available for new homes if an acceptable warranty is in place, says NHBC commercial director Richard Tamayo.
“That is because it protects the homeowner, but ultimately of course, no one wants to be the mortgagee on a worthless property,” says Tamayo.
“The warranty is building-specific and transferable throughout its 10-year life ?so, if you’re the fourth purchaser of a property and regardless of what has happened to the builder, the warranty is in place and entirely insurance-backed.”
The most common claim on an NHBC warranty is, he says, “relatively low-cost water penetration” or “low frequency but very high-cost” foundation failure. The median cost of claims is £3,000 to £4,000.
As a consumer protection body as well as an insurance firm, the NHBC sees the issues surrounding new home insurance within the context of the building sector. “Ultimately, it’s in the entire residential development sector’s interest to not have a problem with failed consumer protection,” says Tamayo. “And, typically, household insurance will not cover material design ?and defective workmanship.”
The organisation also mediates between builders and their customers where they cannot agree on the scope of work to be done. “We give both sides an independent outlet and that is usually less traumatic than other forms of dispute resolution might be,” says Tamayo.
Other types of LDI
BLP Insurance offers LDI through its new housing warranty insurance, underwritten by Allianz. Brian Kilroy, business development manager at BLP, admits the product can be more expensive than an off-the-shelf warranty, but the customer will not face extra costs, such as a registration set-up.
“But the biggest benefit for both developer and homeowner is that they get full cover,” Kilroy says, adding that BLP’s bespoke offering is not limited and will insure up to the contract value of whatever is spent building a property.
This, he says, is particularly suitable for expensive conversions, especially those financed by foreign money. “A lot of people are doing conversions, particularly in London where there is very little spare land, so many are building on top of existing buildings or converting offices or retail spaces into residential.”
Kilroy adds: “For these people, the biggest driver is certainly the maximum liability we can offer; we have no limits. So if, for example, you are investing in the UK residential market and are from Malaysia, India or China, then protecting your investment is a key factor.”
New commercial buildings
BLP also offers an LDI product for commercial-only new buildings. “Our insurance policy provides cover on the entire building, which means that every single retailer who comes into that building has recourse back to our cover,” Kilroy says. “The cover extends to things like escalators, lifts, heating and ventilation. We also cover business interruption, loss of rent and all the costs involved with problems that fall squarely on the owner of the building.”
Existing buildings
Property owners who buy an existing commercial property will also need insurance, though not a latent defects policy. The process starts at the point of exchange which, for those buying at auction, means as soon as the gavel falls.
Julian Mungo, managing director of Aquilla Insurance Brokers, advises clients on how to handle the insurance needs of properties valued at up to £200m.
Regardless of the value, the principle is the same, he says. “After exchange and before completion, buyers should have their interest noted on the existing policy, make sure the premium has been paid and ensure the cover is in accordance with whatever is required.”
He advises buyers not to take out a second full insurance policy at this stage as it can lead to confusion should a claim need to be made. Instead, it is simpler to have the buyer’s interest noted on the property’s existing policy.
Now is also the time to scale up cover if the buyer is not satisfied with the existing policy. This is called a difference of conditions, liabilities or limits. “If the buyer wants a property to be insured for £1m and the vendor is insuring it for £500,000 and won’t change it to £1m, then the buyer can insure it for the £500,000 above the insured sum,” Mungo says. “In this way you don’t have dual insurance and are just covering the difference.”
Other types of insurance to consider include property owners’ liability, which Mungo says should be to a minimum of £5m indemnity. A multi-let property will also require health and safety inspections, engineering insurance and cover for unforeseen mechanical breakdown.
