A latent defect is a fault in a property that could not have reasonably been discovered through inspection before completion, and ultimately sale. This could be due to the design, workmanship or materials used during construction. Defects could arise during the life of a building in key areas such as:
This could be both costly and time consuming to rectify and ultimately affect the value of the property, a major cause of concern for purchasers, financiers and anyone else with a financial interest in the property.
It is the nature of construction projects that faults and defects caused by failures in design, workmanship or materials, may not become apparent or readily detectable (even with the exercise of reasonable care) until many years after completion of the project, long after the end of the defects liability period. Such defects are known as Latent Defects.
A Latent Defect (or Inherent Defect) is a fault in the property that could not have been discovered by a reasonably thorough inspection before the completion or sale of building structure.
Latent Defects Insurance (or Inherent Defects Insurance or Decennial Insurance) provides cover for the cost of complete or partial rebuilding or rectifying work to the insured property which has been affected by major damage. Major damage being defined as:
The Case of France: The Latent Defects Insurance or Inherent Defects Insurance or Decennial Insurance stems from the Napoleonic Code back in 1804. The Code, also known as the French Civil Code, prescribed a strict liability to the parties being directly involved in the construction of a building structure. This liability had a duration of 10 years.
The British Case: Back in the 1930’s, the UK construction industry was dogged with poor building practices. As a result, the inter-war housing boom suffered from poor house building standards. To address these matters, the Government established a legislation stating that builders must deposit 10% of the cost of the build in escrow as a guarantee against any defects arising in the property for 2 years after completion.
In 1965, the first 10-year Structural Warranty became available.
Latent Defects Insurance Today: Today, Latent Defects Insurance is either a statutory requirement or a prerequisite by the financial institutions in a wide number of countries including France, the United Kingdom, Spain, Italy, Denmark, Finland, Sweden, the Netherlands, Ireland, China, Japan, South Korea, South Africa and Canada while a wide number of states are currently considering to impose such legislation for the vast array it provides to their building industry as a whole.
Cover under any Latent Defects Insurance scheme is only provided after a satisfactory Technical Audit has been undertaken on behalf of the Insurer as part of its risk management procedures.
The Technical Audit is carried out on behalf of our Insurers to demonstrate that the scheme represents a normal Risk for Insurance under a Latent Defects Insurance scheme. During the construction process, on-site inspections will be made at critical stages to assess and monitor performance on site and determine if the scheme provides an acceptable level of risk. It should not be inferred that the inspections are for any other purpose. This process gives an investor confidence that his properties are being built in line with current technical standards. In addition, on completion of the development, the Technical Auditors will issue a Certificate of Approval. This provides the investor with the evidence of build quality required by potential purchasers and financiers.
Consumer Protection: Having a Latent Defects Insurance scheme in place will eventually create utmost consumer protection as the step by step risk assessment of each and every project followed by the technical audits conducted by the insurance providers will in effect provide trust from the part of the property buyer and/or investor that his property was built in accordance to the initial drawings and specifications and in compliance to accredited technical standards. Besides the above the property shall be covered with a solid latent defects insurance policy which will indemnify the property owner against any major damage caused by defects in the design, materials or workmanship.
Importantly, the policyholder (property owner) will not have to prove negligence or blame, thus making the process of claiming easy and straightforward while the repairs/rectifications of the damage are effected almost immediately without having to undergo through protracted legal proceedings.
Raising Design and Construction Standards: The prerequisite technical audit procedures will in effect raise building standards; these being in the design and/or workmanship and/or methods of construction and/or materials used. Following the long term insurance policy of the Latent Defects Insurance scheme, the building surveying from the part of the insurers will have to make sure that each and every structure proposed for cover is been designed and built in compliance to the technical standards as well as by making use of tested, accredited materials or in certain cases materials that are “fit for purpose”.
Transparency: The reporting process of the insurer’s technical auditors (building surveyors) ensure transparency in the operations and actions of each party involved in each and every project.
Security to Financiers: Having a Latent Defects Insurance policy in place, it provides utmost security to financiers that the property being financed is been built followed high construction standards and thus their mortgage/financing values are secured from any sort of devaluation due to issues of low quality and the resulting losses from defects which may occur. In that the banking industry receives a robust tool for being safeguarded from low quality developments which will in effect result to losses.