LATENT DEFECT INSURANCE POLICY

Latent defects are normally defined as faults in the design, bad workmanship & materials; of a new building that remain undiscovered or hidden at the date of practical completion, but come to light afterwards by virtue of physical damage, and are of a type that could not reasonably have been revealed by the insured.

The Insurance angle:

This cover provides protection to the insured Property comprising of-

Structural Components- All load-bearing parts of the Insured Property essential to the stability or strength of the Insured Property being foundations, pillars, bearing walls, beams, slabs, floors, staircases, external walls, external cladding and roofing
Internal Components, Fittings, Installations and Contents –Internal non load bearing walls, partitions, windows, doors, tiling, mechanical, electrical equipment, sewerage net etc
External Components- Pavements, crossovers, paved areas, access roads, pedestrian paths, retaining walls, landscaping works etc.

Cover is given only for the buildings or civil structures about to be constructed

Need for the LDI policy:

Latent defects are not covered under the traditional policies of Fire, Engineering(CAR), extended maintenance and Professional Indemnity.
LDI policy is a first party policy, which means that in the event of a claim; this policy can take precedence over any contractual or legal rights.
This policy is assignable during the tenure of the policy.
The requirement of technical inspection by independent engineers improves the quality of the building and gives reassurance to the buyer
Policy is freely assignable and can be taken by the developer, property owner, tenant or contractor.

Insurers shall indemnify the Insured for collapse of or physical damage to the Insured Property or any threat thereof caused by an Latent Structural Defect of such property, hereafter termed Loss, provided Loss is notified by the Insured to Insurers during the period of insurance specified in the schedule

Coverages

Structural defects inherent in nature
Internal and external components owned by insured due to structural defect
Ingress of water (excluded for first 12 months)
Threat of imminent collapse requiring remedial works to prevent damage caused by a defect in design, workmanship or materials but not discovered before inception of the cover
Covers cost of repair, restoration and strengthening of the structure

Exclusions

Terrorism, Nuclear risk
Latent defects of material, workmanship, design, plan or specification of: Internal Components, Fittings, Installations and Contents; External Components;
Willful acts and gross negligence
War and allied perils
Defects known prior to inception
Defects due to lack of maintenance or misuse Consequential losses (furniture, process equipment, stocks, etc.)
Subsidence heave or landslip unless due to an inherent defect

What is the sum insured and who can take the policy?

Sum Insured of the Insured Property shall correspond to the Estimated Value of the Insured Property at that date including costs of construction, design, management and supervision but exclude the value of land

Comparison between Project PI, Design Defect and LDI

Design Defect	LDI
Does not cover defects in absence of physical damage	Full Cover
Excludes property that is defective and covers other insured property that is free of defect and is damaged by the defective property.	Full Cover

Professional Indemnity would cover negligence in design but exclude liability for inadequate workmanship or materials. Moreover, PI is a 3rd party cover whereas LDI is a first party cover.

Applicability in Indian Market

The RERA ( Real Estate regulation Act) makes it mandatory for the architects, structural engineers, construction company, contractors and consultants appointed for various activities; to get this cover, as they will be held accountable for a period of 10 Years post construction- Period of Insurance.