Protect your business against construction defects

There was over €5.5 billion invested in the Irish property market in 2021, making it an extraordinary year for investment in Ireland’s commercial property sector.^[1] Additionally, it was predicted that over the next five years, capital values will rise in certain sectors of retail while industrial growth is expected to slow. ^[2]

With construction growth and investor appetite strong, it’s imperative to have Latent Defects insurance (LDI) in place to provide financial protection against construction defects that aren’t solved by the original contractor.

Having a warranty in place in advance will typically be cheaper for your business but will also improve your cash flow by preventing hold-ups further down the line.

We held a Q&A session with Account Executive Frank Cullinan to answer frequently asked questions about this specialist insurance product. Read on to find out more.

What is a Latent Defect insurance policy?

Latent Defects or Structural Warranty cover is a policy designed to protect the property owners or developers if any structural defects are discovered after practical completion. It provides full recovery of the costs of rectifying defects  without having to rely on the contractors or any of the design team’s insurance.

What is a latent defect in a building?

A latent defect in a building can be anything from structural defects such as cracking of floor slabs or walls, ingress of water, subsidence or any defect that affects the structural integrity of the building. There could be issues with the basement tanking which allows water to penetrate the building causing damage or inadequate foundations causing subsidence.

Are latent defects covered by warranty?

Latent defects and any physical damage or loss arising out of or caused by latent defects are covered only if there are no warranties, guarantees, or other insurance covering the latent defect or such damages or losses.

How long do latent defects last?

Liability for latent defects will continue for a period of between 10 – 12 years after the final completion certificate is issued. If loss of rent is included that is normally covered for 1 – 3 years.

Who is responsible for construction defects?

There may be several responsible parties, but generally, this lies with the general contractors, developers, and the builders of residential structures even if the work was performed by  subcontractors or if the defective materials used in construction were manufactured by others.

Having Latent Defects insurance can reduce the reliance on collateral warranties, guarantees, and Professional Indemnity insurance by the professional team involved in the building project but should not be seen as a substitute for these. Both collateral warranties and Professional Indemnity policies require the claimant to prove the fault or negligence of a third party. Professional Indemnity insurance would also only cover the relevant contractor’s professional liability, for example, negligence in the design works but would not provide liability for defective workmanship or materials.

Sources:

1. https://www.irishtimes.com/business/commercial-property/irish-property-market-investment-5-5bn-in-2021-says-savills-1.4772364
2. https://www.savills.ie/blog/article/323757-0/commercial-property/five-themes-for-commercial-realestate-in-2022.aspx