Latent Defects Insurance (LDI) is a policy that covers developers or homeowners against damage that is a result of a defect in design, construction, or the materials used. This cover focuses on the defects that only became apparent after the completion of the project. 

A wide range of latent defects will only become apparent once a project is complete, and this could result in many property owners being left with unmanageable costs, which could have been dealt with if an LDI policy had been in place. A common issue includes inadequate foundations, which lead to subsidence, and another common claim includes the ingress of water. 

It is important to ensure that LDI policies are in place before construction starts because premiums can increase by as much as 20% for every key stage of the build that goes through without insurance. 

Suppose developers don’t secure a warranty until after the build is complete, in that case, the premiums can increase by as much as 100% from the potential insurance premium had it been arranged at the outset.

Should Collateral Warranties Be Part Of Your Exit Strategy? 

Collateral warranties should not be used as an alternative for LDI insurance. However, they can provide their own benefits in terms of mitigating levels of risk. The key differences to be aware of include:

Negligence

A collateral warranty requires negligence to be proven – this can be a lengthy and time-consuming process. 

A Latent defect insurance policy, on the other hand, will pay out irrespective of who’s at fault.

Insolvency

In the event of an insolvency, any rectification costs will need to be met by the owner. However, this isn’t the case with a structural warranty, as the insurer will meet any cost for rectification regardless of who is solvency or ability to rectify the defect.

Professional Indemnity Insurance

 PI insurance becomes invalid in the event of insolvency- this means the owner has no right to recourse in the event of a defect. 

 However, in the case of structural warranties, if a defect is covered under the policy, it will be covered irrespective of whether the PI is in place.

Assignability

Structural warranties can be assigned an unlimited number of times throughout the lifetime of the policy -unfortunately, this isn’t the case with collateral warranties. 

Structural warranties for commercial and residential properties offer not only provide financial security but also peace of mind should any structural defects come to light. Taking into account the changes in the latent defects market, independent advice from specialists in the industry is now considered mandatory.