Inherent Defects Insurance (IDI), also known as Latent Defects, has been written in the UK insurance market for more than 35 years and is fast becoming a vital component in any construction project. Matthew Gosling, Senior Underwriter, Construction and Engineering at International General Insurance (IGI), explains how changing market appetites, the exposed dangers of using unrated insurers, and a push from the UK government and mortgage lenders to raise standards in the construction market, has seen an increased demand for IDI policies.
Why is demand for IDI policies increasing?
An IDI policy covers damage to a property after completion that happens as a result of latent defects in the structure of the property due to defective design, workmanship or materials. An IDI policy will deliver long-term protection against the structural defects that occurred during the construction of the building which manifest after completion causing damage and the cost of repairing, rebuilding or strengthening the insured building.
An IDI policy can work hand-in-hand with all other types of coverage required for a construction project, and property insurance is increasingly being seen as essential for property developers, financiers, and owners.
In the UK, these policies are invariably being requested for lending purposes. It is almost always a requirement of the mortgage lender for any residential property built in the last 10 years to have a Council of Mortgage Lender (CML) acceptable warranty. The warranty provider will need to approach every single lender individually for approval. This process is cumbersome, unreliable and can take years. In the past, mortgage lenders accepted Architects or Professional Consultants Certificates, but these are increasingly being rejected and furthermore lenders are requesting IDI cover on conversions, extensions and structural alterations to residential properties.
The collapse of Denmark’s unrated Alpha Insurance in March 2018 has also brought these issues to the fore. The failure of this insurer has left many thousands of policyholders in limbo and also acted as a wake-up call for the construction industry, which has been assessing just how secure capacity from unrated insurers really is. This has led to increased scrutiny from the UK government, the mortgage lenders and a tightening up of regulations in the construction market.
What new measures have the UK government put into place for owners, developers, and contractors and why?
In October 2018, the Government announced it will be appointing a New Homes Ombudsman with a clear objective to raise standards. The New Homes Ombudsman remit will be to introduce new measures to support homebuyers, promote the building of more homes and improve building safety.
How important is it for insurers to be A-rated?
Every insurance broker knows the risks associated with using unrated insurers. The solvency of an Insurance Company and its ability to pay claims is important on annual business but becomes crucial when the cover period is 10 years.
The recent advent of non-rated capacity providers going into administration has meant that contractors and developers, who had already purchased a policy with the unrated insurer, are left out of pocket with a worthless insurance policy.
Developers and their Contractors are unable to sell on the properties without this cover as the mortgage lender requires this cover to be in place, so then have to buy a second/replacement policy – which will cost them double the first one as a new insurer will be looking at a completed structure rather than a building site. The reason you pay double for a completed structure is because insurers are unable to survey at key points of the build to ensure quality throughout.
There is currently no legal or FCA requirement for an insurer to be rated, but brokers could face legal action if an insurer fails particularly with long tail insurance business. The failure of Alpha demonstrated the harm that can be caused to customers when thousands of policyholders had to find alternative insurance cover when the insurer collapsed.
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