Rest assured

An unprecedented number of new hospitals and primary care facilities will be built in the next few years and this £10.6 billion development is likely to continue, at least in the medium term. The Government announced recently that under this building programme for the future, 116 new hospitals and 188 primary care facilities would be constructed. There is great pressure for developers to deliver timely completion of hospitals and medical centres and defects insurance cover provides both protection and an effective framework for resolution.

How does it work?
A latent defects policy protects the insured against the cost of rectifying damage to a building caused by a defect that existed in that building but was undiscovered at the date of practical completion. Under the standard cover, the defect has to be in the structural parts of the building as defined in the policy. Although this should be enough to take care of sizable claims standard cover should also include protection against failure of the weatherproofing and waterproofing elements of the building. Some insurers offer wider cover and, with increasing demand for this type of insurance, we are likely to see the range of cover increase.
    
Most policies run for twelve years from practical completion. An essential feature is the appointment of an independent technical auditor to check the design and oversee the works. Experience indicates that these auditors help to prevent defects in the first place. Structures other than buildings can sometimes be covered but the market can be limited.

Protection
Building community healthcare facilities for the 21st century is big business and the Government’s preference for a plurality of provision, using the PFI system, has meant that a wide range of organisations now have a vested interest in ensuring that building projects are completed as planned and without complication. With the ever-increasing pressures – both commercial and political – to deliver new build openings that meet both quality standards and tight deadlines, those involved should protect themselves with defects insurance cover. This gives protection that provides for quick and effective remedial activity to take place. It is highly effective because it removes many of the delays that occur when parties are locked in disputes relating to liability.
    
Ray Robinson, technical consultant at Aon, states: “Experience tells us that when construction projects – be they major public works or a new house – run into difficulties, they can go horribly wrong, with legal bills and repair bills running into the millions”.

The simple life
Defect insurance is a simple solution for any party involved in a construction project. In essence the insurance protection enables an insured, on discovery of damage by an insured defect, to make a claim. As a first party cover there is no need to prove negligence. The benefits are plain. Defect insurance removes any need to sue builders, architects or others over problems that develop and to go back and forward trying to make sure repairs are carried out.

The cover
It is crucial to establish from the outset what is and is not covered. Originally, defects insurance simply offered cover for repairs to damage to structural parts, plus damage arising from failure of weatherproofing and waterproofing. Structural parts are usually regarded as foundations, columns, beams, external walls and cladding, external doors and windows, stairs and floors, roofs, and other external and internal load-bearing elements essential to the stability of the property. However, definitions do vary and some appear wider than others.
    
If you want the widest possible cover, you need to consult an expert broker - latent defects protection is not offered as standard by all insurers. To ensure protection beyond that already given indirectly by annual engineering policies it is worth considering on heating, air conditioning and lifts.

Exclusions
As usual, there are likely to be a number of policy exclusions, such as fire, lightning strike, storm and flooding, which are covered by annual property insurance policies, plus works that were outstanding at completion and use of the property in ways for which it was not designed.
    
In general, prices have come down; it is now possible to buy cover for 12 years more cheaply than it used to cost for ten. Plus, insurers will pay for the cost of repairing damage, remedial action to prevent further damage, professional fees, cost of debris removal and costs to meet local authority requirements.
    
Policies are usually taken out in the name of the developer but they can be assigned to new owners, lessees or financiers. Insurers may also be prepared to waive rights against architects, engineers, contractors and others on payment of an additional premium. That removes the fear of litigation for these third parties. Suppliers, however, do not qualify for these so-called waiver or subrogation rights – that is the right of the insurer to pursue the rights the insured has against third parties.
    
When buildings cover is purchased it is usual for loss of rent to be insured as well. The basic policy will, for instance, include cover for the cost of removing contents from the building. In fact any form of consequential loss may be insured but it is important to make it clear from the outset that it will be required.

Go in peace
Construction projects benefit as well. Developers do not have to rely on professional indemnity insurance to sort out problems. The potential for confrontation is reduced and there is greater peace of mind for the project team, with less time and money spent arguing about contracts and warranties, thereby encouraging innovation.
    
With defect insurance cover in place everyone involved in a new build can focus on getting the design and construction right. A properly arranged policy, agreed after expert advice from a broker who knows the market, means the job gets done with the minimum of fuss and legal argument.

For more information
Aon Ltd has published a 32 page guide to latent defects insurance and the benefits it offers the construction industry. Copies can be obtained from the editor, Ray Robinson on ray.robinson@ars.aon.co.uk .