Kim Vernau, Chief Executive Officer at BLP Insurance explains which is best, warranties or insurance?
There is, and always has been, debate in the construction industry around warranties and insurances and just which one is best under the circumstances. The truth is that both are just as important as the other. Simply put, a warranty promises that the manufacturer will fix a fault with a malfunctioning product. While an insurance policy promises that the insurer will pay to have that fault fixed.
When choosing which cover to go for developers must consider which product would give them and the ultimate buyer or tenant the best protection if something were to go wrong with the property or development later down the line. In general terms, warranties and insurance on properties and their structural components both offer a ten year policy which transfers from owner to owner, and covers both new builds and conversions.
Recovery under a warranty can be an arduous process and take a long time to be resolved. For a warranty to respond, the claimant has to prove a) the property was constructed in breach of the warranty provider’s technical standards; and b) the effect of the breach was to cause structural damage. It is these crucial aspects which can cause severe delays while parties argue about who was at fault, causation and technicalities. Warranties may also include conditions and limitations which affect the extent of cover. The maximum amount of cover available in financial terms can be less than the value of the property being developed. What’s more, the cover may not provide consistency in terms of the protection offered over the 10-year period; what is covered in the first couple of years may not be covered for the remainder.
Traditional ‘warranties’ were not designed to meet the developing needs of many investors looking at the UK real estate sector. Typically, warranty products are offered which may not provide sufficient levels of cover to match the millions of pounds invested in many large developments. Scheme limits are traditionally set at £25m for new builds and only £5m for conversions, as well as limits on individual units of only £1m and £500k respectively. This leaves thousands of new properties woefully underinsured and potentially causes problems for tenants, residents, homeowners and investors alike who are left financially exposed to any shortfall should a significant building defect arise.
A further consideration for anyone involved in the construction industry today is the potential insolvency of development partners. If a contractor becomes insolvent during the build, this can have serious consequences for the funder/investor. Warranties, for example, would need to be re-arranged and are likely to incur a significant additional cost.
An insurance policy, however, covers the building, rather than the builder, and relies solely on the evidence of physical damage rather than who is to blame. Who is to blame can be addressed afterwards. The main attraction of insurance is that it insures the sum agreed at the commencement of the policy, and is straightforward. This becomes apparent when something goes wrong.
Latent defects insurance is being increasingly used for commercial new build projects including mixed used developments. It provides the most comprehensive mechanical and electrical cover in the market and protects the building against component failure, loss of rent and business interruption in the event that problems with a building occur later on. The cover can be taken out by the developer, contractor, owner/funder, landlord or tenant and may be assigned to any future owners, funders or tenants.
Reputable insurance companies will also assess a build project from design through to workmanship on site to help minimise the chance of any future building defects occurring. In an environment where construction rates are rapidly rising and the risk of standards slipping is greater, this assurance creates a more saleable property with the comfort that the build has been finished to a high standard. Prospective tenants are also safe in the knowledge that if anything happens to the building, their financial risk can be mitigated.
When it comes to the residential sector, many lenders now insist that a new build home is protected by a warranty or insurance before they will release the necessary funds. It is therefore mandatory that developers provide such cover. The decision of the builder as to which type of warranty/insurance they take should also consider the cover ultimately being provided to the buyer who will benefit from the policy once the build is completed.
A builder or developer’s reputation is clearly important to the buyer when considering the quality of a property. A buyer will also want a reliable and responsive cover. BLP Insurance provides housing warranty insurance for the structure and, in some circumstances, for the non-structural elements of a property. We won’t dictate how a contractor builds. We will work with them to assess the methods of construction and help to construct better properties which are built to last and protect the investment against the consequences of building defects.
Latent defects insurance covers the building not the builder. While it is better to get it right first time, the cover provides comfort that should anything go wrong later down the line, any problems can be fixed quickly and with minimal aggravation through a single point of reference.
Chief Executive Officer
Tel: 020 3813 5447