Latent defects are hidden faults in design, materials or workmanship that are not visible when a building is completed and only come to light later. For developers, property owners, employers and the investors and funders behind a project, they can create costly problems long after the contractor has left site. Latent Defects Insurance (LDI) is designed to respond to this risk. Stand-alone cover is currently difficult to obtain in South Africa, so Berkley Risk is looking at ways to address latent defects as part of the project’s wider insurance programme, particularly alongside Construction All Risks (CAR) cover.
Latent Defects Insurance and CAR Coverage: What You Need to Know
Construction All Risks (CAR) insurance covers physical loss or damage to the works while the project is being built. Once a project reaches practical completion, CAR cover usually comes to an end, apart from any maintenance or defects liability period stated in the policy. Defects that were hidden at completion may only become apparent later, which can leave the project’s owners and funders exposed.
Latent Defects Insurance is designed to respond after completion, to defects that could not reasonably have been detected when the building was handed over. Depending on the policy, this may include structural problems, water ingress, or issues with foundations and walls. The scope, duration and conditions of any cover depend on the insurer and the specific project.
The two covers are best considered together. Insurers who consider latent defects cover typically want to understand the project from an early stage, including the design, the contractor, and the inspections carried out during construction. That is why latent defects should be part of the conversation while the project is still being built, not only once CAR cover ends.
What is Latent Defects Insurance and When Does it Apply?
Latent Defects Insurance (LDI) is designed to cover damage caused by defects in design, materials or workmanship that were not visible or detectable at practical completion. Depending on the policy, examples may include subsidence, structural failure, or water ingress through the building envelope, which might not become apparent until some time after completion.
Cover normally applies after completion, but it should be considered while the project is still under construction. Insurers generally need information about the project, and may require technical inspections during the build, so leaving it until the CAR policy ends can mean the opportunity to arrange cover has already passed.
How long cover lasts, what it includes and what it excludes will depend on the insurer and the project. Any cover that is available should be reviewed carefully against the project’s risks and the requirements of its funders and investors.
Why Standard Property Insurance Doesn’t Cover Latent Construction Defects
Standard property insurance policies typically exclude loss or damage arising from defects in the original design, materials or workmanship. They are designed to cover sudden events such as fire or storm damage, not faults built into the property from the start.
This means a property owner who discovers a structural or waterproofing problem after completion may find that their property policy will not pay for the repairs. Recovering the cost from the contractor or professional team can be slow and uncertain, particularly if the contractor is no longer trading or the cause of the defect is disputed. Property owners should review their policies carefully and speak to their broker about how latent defects are treated.
Who Needs Latent Defects Insurance in South Africa?
Latent defects are a concern for anyone with a financial interest in a completed building, in particular:
- Developers, who may face claims from buyers or tenants, or the cost of repairs, after handover.
- Property owners, who carry the cost of hidden defects once the contractor’s obligations have ended.
- Employers and project principals, who commission the works and need to manage risk beyond practical completion.
- Investors, whose returns depend on the building performing as expected.
- Funders, whose security depends on the value and condition of the completed asset.
The risk is most significant on larger new developments, such as commercial offices, shopping centres, industrial facilities and multi-unit residential developments, where a hidden defect can affect many units or tenants at once.
How Berkley Risk Approaches Latent Defects Cover
Stand-alone Latent Defects Insurance is currently difficult to obtain in the South African market. Berkley Risk is therefore looking at ways to include this type of cover as part of a broader construction insurance solution, particularly alongside Construction All Risks (CAR) cover. The exact cover available will depend on the project and the insurer.
If latent defects are a concern on your project, speak to us early, ideally while the construction insurance programme is being put together. We can then assess the project and explore what options may be available as part of its wider construction and engineering insurance.
Frequently Asked Questions
What is latent defects insurance?
Latent defects insurance is designed to cover damage caused by hidden defects in design, materials or workmanship that were not detectable when a building was completed. What is covered depends on the policy and the insurer.
Who needs latent defects insurance in construction projects?
It is most relevant to developers, property owners, employers and project principals, and the investors and funders behind a project, because they carry the financial risk if hidden defects appear after completion.
Can I buy stand-alone latent defects insurance in South Africa?
Stand-alone cover is currently difficult to obtain in the South African market. Berkley Risk is looking at ways to include latent defects cover as part of a broader construction insurance solution, particularly alongside Construction All Risks (CAR) cover.
When should latent defects cover be considered?
While the project is still being built. Cover normally applies after completion, but insurers generally need information about the project and may require inspections during construction, so it should be discussed when the construction insurance is arranged.
What types of defects may be covered?
Depending on the policy, cover may include structural defects, water ingress and defects in foundations or walls. Wear and tear, poor maintenance and defects known at completion are typically excluded.
How long does latent defects cover last?
It depends on the insurer and the specific project. The period of cover, like the scope and exclusions, is set out in the policy and should be reviewed against the project’s needs.
TL;DR Latent defects can create problems after a building is completed, and standard property insurance does not usually cover them. Stand-alone Latent Defects Insurance is currently difficult to obtain in South Africa. Speak to Berkley Risk to address this risk as part of the wider project insurance programme, ideally while the project is still being built.
