What are the limits of latent defect policies?

Vivid Housing Ltd owns the freehold on the 82 flats in the 20-storey block in Collins Place, Portsmouth. The company has run smack-bang into one of the nasties in the latent defects insurance business. It pointed insurer Allianz Global Corporate & Speciality SE to five worrying defect items in the 12-year-old building.  Dear me, said the insurer, these so-called latent defects, even if they are defects, are not covered by the wording in the policy.

It said defects would be covered only if they destroyed the building or physically damaged the premises, or represented a “threat of imminent destruction or physical damage to the premises which requires immediate remedial measures for the prevention of destruction or physical damage within the period of insurance”. 

So, what were the worrying items?

There is a big plus for latent defects insurance and several hidden ambushes. best of all, it is a lifesaver in mitigating the fact that builders who did the original works frequently go bust 

• Defect #1: the rock panel cladding installed in the over 18-storey building in conjunction with combustible foam installation was absent cavity barriers, with combustible debris in the cavities providing a vehicle for the speed of fire or smoke around the entire external envelope. 
• Defect #2: absence of vertical cavity barriers. 
• Defect #3: absence of horizontal cavity barriers. 
• Defect #4: the brackets holding the cladding panels are inadequately fixed, bringing the risk of panel detachment. 
• Defect #5: the debris is a potential source for ignition for fire. 

So, Vivid and Allianz went to court for a preliminary issue of whether, assuming all or any of the defects existed, the latent defects insurance policy should pay out for the remedy. I will tell you in a moment what the High Court decided.

There is a big plus for latent defects insurance and several hidden ambushes. Best of all is that the device is a lifesaver in mitigating the awful fact that builders and subcontractors who did the original works frequently go bust. The original builder of Collins Place, a residential high-rise building, went out of business in 2014. But the latent defects policy didn’t die at the same time. It is a benefit that attaches to the property, rather than an individual party. 

I also like the concept in the policy that the insurer is to pay out without having to sue and prove the builder – or whoever else may have caused the poor work – is at fault. And if the architect or engineer is the culprit, the insurance still triggers payment. All that is required is that the defect is a defect covered by the wording in the latent defects policy. And that became the stumbling block in this Vivid case – a decision was needed on the scope of the policy wording. What was the situation when there was said to be a “threat” of damage or destruction; and was it such a threat that “required immediate measures”?

What do you make of defect #1? Does it fit within the insurance policy? Is combustible foam and debris in the cavities a “threat” of damage or destruction? Go further, the policy requires the threat to be an imminent one. Counsel for Allianz said there was no imminent threat. And in all these intervening years no urgent remedial works were undertaken. The judge was not impressed. She said, “If a fire broke out, the consequences would be catastrophic.” It was an imminent threat, no matter how long it had all sat untouched on the building. 

As to defects #2 and #3 – the absence of cavity barriers – that too is an imminent threat and one requiring immediate remedial works to prevent destruction or damage. Defect #5 – the debris as an ignition source – was ruled on similarly.

Defect #4 was, said the judge, of a different nature. Vivid argued there was imminent danger from the risk the bracketing might fail. Those metal brackets were holding the cladding onto horizontal and vertical metal rails. A failure would likely see the cladding panels come away. But no brackets had actually failed yet, and there was no indication of when the brackets might deteriorate further, or that year-by-year stressing would cause failure. So the judge stepped back from characterising the brackets as an imminent threat requiring immediate measures. The latent defects policy did not cover this part of the claim. 

It is very ordinary and an awful pain to be involved in an industry with a habit of firms going bust, making it impossible to get a remedy for defects; and as defects are another ordinary circumstance of the building business, you can see the appeal of commercial defects insurance. True, this policy is another item on the costs schedule – and it’s also a job for the employer or developer to choose what should be covered. 

The options are plentiful. A basic package covers defects in design, workmanship, materials, ingress of water. Do you go further and get cover for the M&E installation, basement and tanking works, groundworks, even items such as Japanese knotweed? And of course get cover for housing residents while the works to the roof, walls or windows are being carried out. On the practical side, the insurer will safeguard itself and the insured by engaging inspectors to cast an eye on the building work as it gets done. It is fair to say this safety net of latent defects insurance has become a hefty expense, but you and I know that getting defects put right once the builder has disappeared doesn’t come cheap either. 

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple