John Hughes D’Aeth (24 July, page 48) makes some valid claims about the value of latent defects insurance (LDI) but says it is no replacement for collateral warranties

This is a subject I have debated with him in the recent past, so he will not be expecting me to agree with him.

In relation to collateral warranties he states: “At least we know where we stand with them”. Well, the lawyers might – after all, there is an institutional obsession with them that perpetuates potentially costly “risk dumping”. However, speak to many clients and they have very misguided views as to their value.

For a collateral warranty to have any effect whatsoever, it has to be backed by professional indemnity (PI) insurance. A PI policy is not a benefit to the client – it is a “defence mechanism” for a contractor or consultant. Negligence has to be proved – no wonder 80% of all construction insurance claims consist of legal and forensic costs!

John lists a number of supposed drawbacks with LDI:

  • Pure defects, such as M&E failures, that do not result in damage are not usually covered. Component failures are now regularly covered and do not need damage for a claim to be admitted.
  • n Consequential losses are usually excluded. Consequential losses such as loss of rent or interest are regularly covered.
  • n Claims are generally subject to a large deductible, which can be more than £250,000. Policies are frequently arranged with deductibles of £50,000 or less.
  • n The policy wording is often unclear. He admits many are now in plain English. Make sure a specialist broker negotiates.
  • n The requirement for technical inspections is an extra expense for the developer. Likely to cost a hell of a lot more when negligence needs to be proved.
  • John states that “LDI has been over-egged by its promoters”. Well, I am very happy to be one of the “over-eggers”. As he says, “LDI provides no fault protection”. Give me a robustly created LDI policy over collateral warranties any day!

Graham De Roy, director, Tyser & Co