Latent defects insurance and the ten-year problem

A latent defect is one that was not apparent at handover and appears later: structural movement, waterproofing failure, a cladding fixing that was never right. The rectification period has long ended. The question is who pays.

The contractual routes, and why they thin out

On paper the employer sues the contractor for breach, or the designer for negligence. In practice three things get in the way.

Limitation. Six years from breach on a contract signed under hand, twelve if executed as a deed. A defect appearing in year eight on a contract signed under hand is out of time before anybody notices it.

Insolvency. Construction companies dissolve. A judgment against a company that no longer exists is an expensive piece of paper.

Missing documents. The collateral warranty that would have let a purchaser sue the engineer was drafted and never executed, which is the ordinary state of about a third of them.

What the cover does

Latent defects insurance, sometimes called structural warranty or inherent defects insurance, is a first-party policy taken out by the employer. It pays for the cost of putting right specified defects, typically over ten or twelve years from practical completion, without anyone having to prove fault.

That last part is the whole value. No defendant, no negligence to establish, no limitation argument.

It has to be arranged before the work

This is what catches people. The insurer needs to appoint a technical auditor to inspect during construction. Cover cannot usually be bought after the building is finished, and certainly not after a defect has appeared.

The decision therefore belongs at the very start of the project, alongside the procurement strategy, not in the run-up to handover.

What it typically covers, and does not

• Usually covered: structure, weatherproofing envelope, sometimes mechanical and electrical by extension.
• Usually not: finishes, wear and tear, defects arising from lack of maintenance, and anything the insurer’s auditor flagged and was not corrected.

The exclusions matter as much as the cover. A policy that excludes the element most likely to fail on this particular building is a premium paid for reassurance.

Where it earns its keep

On residential development it is often a funding or sales requirement rather than a choice. On commercial work it is a judgement about whether the covenant strength behind the contractual routes will still exist in a decade, and on a project built by a thinly capitalised contractor the honest answer is usually that it will not.