Latent defects insurance – buyer beware?
Latent defects insurance (LDI) has become a mainstream product in the new build housing and commercial property market, with all major residential mortgage providers and some commercial funders requiring an approved form of LDI to be put in place by the developer or the builder for security against latent defects.
It is becoming increasingly common for LDI to be pushed by developers in lieu of more traditional forms of security, such as 12 year contractual liability for latent defects and a full suite of collateral warranties from the supply chain.
The potential issue with LDI is that it is a separate 'product' in the form of a contract for insurance, subject to its own policy terms and conditions, that sits outside the contract a purchaser may have with its developer or builder. Therefore any potential claim under the LDI policy is subject to the standard terms of the specific insurer, including any limitations of cover. This has been raised in a recent case where homeowners brought a claim against the insurer in relation to latent defects at their home under the terms of an LABC new home warranty.
In Sehayek and another v Amtrust Europe Ltd, the homeowners purchased the property from the developer, Grove End Gardens Limited (Grove). Grove entered into a JCT design and build contract with Dekra Penthouse Developments Limited (DPD) to construct the property. Grove and DPD were connected companies, which can be common on residential development schemes. Amtrust Europe Limited (the Underwriter) issued the certificate of insurance under the LDI policy in July 2016, putting the LDI policy on risk.
The 'developer' named on the certificate of insurance by Grove was "Dekra", which was understood to be a reference to Dekra Developments Limited, rather than either Grove or DPD. In early 2017, Dekra and DPD went into insolvent liquidation, and the homeowners subsequently made a latent defects claim under the LDI policy with the Underwriter in September 2017.
The LDI policy only covered the homeowners in relation to a 'developer' registered under the warranty scheme, with whom the homeowners had entered into an agreement to purchase the property or who had built the property. Therefore the Underwriter denied cover on the basis that Dekra did not meet the definition of 'developer' for the purposes of the LDI policy. The Court agreed with the Underwriter, and the homeowners' claim for latent defects under the LDI policy failed.
Therefore despite the fact that the error in naming "Dekra" as the developer on the certificate of insurance was not due to the homeowners, and the Underwriter taking the payment of the premium, the homeowners were left without cover under the insurance.
This case highlights the importance of property owners (or their solicitors) taking care to check that the correct 'developer' is named on the LDI certificate. The case raises issues of an insurer being happy to take the premium but refusing to honour the policy, and also whether an LDI policy is truly a like for like protection in lieu of more traditional contractual security documentation.
LDI is perhaps not the silver bullet to replace collateral warranties that some would argue it to be. Property owners may need to review their existing policies in light of this recent development, and any documentation relating to properties currently in the process of being purchased should be checked thoroughly prior to completion to ensure the parties are named correctly.