Latent defect insurance can be confusing if you aren’t familiar with it as the way it is purchased, as how it functions can be very different from most other types of insurance.
If, for example, you were purchasing car insurance; you would (either through a broker, or online), get a quote for that insurance. If the quote was acceptable to you, you would pay for the quote and cover would commence usually right away. Your car would be the item that is insured, and you would be the beneficiary of that insurance, so if your car was insured for £10,000 and it was stolen, a valid claim would result in you receiving the £10,000 to buy a new car. This scenario is typical of most types of insurance.
However, with latent defect it doesn’t work that way.
Latent defect insurance (also called Structural Insurance, Inherent Defect Insurance, or Structural Warranties), covers defects to a property that weren’t apparent, or would reasonably be undetectable at the time of construction. Most mortgage lenders in the UK will require a 10-year Latent Defect Insurance (LDI) policy to be in place before they will lend money on the property. The 10-years runs from the practical completion of the construction property (usually when Building Control is signed off).
Because of the nature of the defects it is important that the property is inspected during its construction, either by an LDI inspector, or a qualified building inspector acting on behalf of the LDI provider. These companies are usually acting on behalf of the insurer as opposed to the developer or ultimate home owner, and this is where the differences start to creep in.
With you car policy, you are buying it at the time you need it to go on cover, with LDI insurance you need to buy it before you start building to allow conditional cover to be explained, and for the inspection process to start. That said, the property won’t actually go on cover until its finished and would be subject to it being satisfactorily signed off by the inspector.
Once that it done, and a building control certificate has been issued, the property will go on cover and be insured, but who is the beneficiary of that insurance?
The answer is actually fairly straightforward. Whoever is the legal owner of the property at any given time can benefit from the insurance and make a claim.
Usually for a short period of time, the developer is the beneficiary. This is usually during the period between the property being ‘signed off’ and it being sold to the first buyer. Once that sale is complete, the buyer (homeowner) becomes the beneficiary, and this continues in relation to whoever owns the property until the 10-years is up. During that period the owner is entitled to make a valid claim against the policy.
Mortgage lenders require this cover to be in place as an LDI policy allows them to ensure that there is insurance in place for those unforeseen issues that may arise after construction is completed. Mortgage lenders hold security over properties they lend on, which allows them to repossess the property if a borrow is in breach of their terms. In this instance, the lender (or their agent) becomes the legal owner of the property, and they then have the right to claim.
While it all seems complicated, the simple answer is that whoever owns the property at any given time during the policy term, is the beneficiary of that policy and legally entitled to claim against it.
Compariqo works with a wide range of builders and developers in the UK and prides itself on an open and transparent approach to the insurance it distributes, and how that insurance works. Get in touch for a no-obligation quote and see how we can help you with your next project.
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As an independent broking business, Compariqo is focused on arranging structural warranty and insurance cover for residential developments for our customers. As well as a suite of complementary insurance products to meet the demands of developers and SME builders, we can also source a wide range of finance solutions through our relationship with one of the UK’s top business finance specialists and their extensive panel of lenders, meaning we can cover all of your construction insurance and property finance needs.