Historically developers working on commercial projects’ attitude to latent defects insurance (LDI) has been: ‘Our lender hasn’t requested, so we won’t be in the market for LDI on this one.’

However, it certainly appears that the tide is turning. At a recent client meeting, J3 advisors were pleased to hear that a prolific developer across residential, commercial, and leisure projects always provides latent defects insurance on each scheme, not only their residential portfolio. The importance of LDI has been highlighted in the wake of various legal proceedings. These have spotlighted why and where the inefficiencies of solely relying on professional indemnity insurance (PII) and collateral warranties lie.

In April 2021, The Technology and Construction Court (TCC) considered whether a firm of engineering consultants engaged by a sub-contractor owed a duty of care to the main contractor. The case Multiplex v Bathgate & others highlight why latent defects insurance is essential for construction projects.

Contractors and sub-contractors

Multiplex was the design and build main contractor for the construction of 100 Bishopsgate in London, and the brief was to comprise three main buildings around an open public area.

Bathgate, formerly known as Dunne Building and Civil Engineering, was appointed as sub-contractor for the design and construction of the concrete package of works to Building One.

Dunne appointed BRM Construction LLC (BRM), a specialist design and engineering consultancy, to design the slipform rig. Dunne also brought in RNP, an independent design checker, Bathgate to independently check the design by specialist consultants BRM.

After Dunne was placed into administration, Multiplex appointed Byrne Brothers Limited (“Byrne”) as an alternative sub-contractor. It was at this point that defects in the concrete works were uncovered.

The conclusion reached was that the slipform rig (the design of which had been the subject of RNP’s checks) was unsafe.

No unlimited responsibility

After a three-day trial in the TCC, the Judge found that RNP owed no duty of care or warranties to Multiplex.

The court heard the contractor issued proceedings against the sub-contractor and the designer. However, the sub-contractor was in administration, the designer was uninsured, and the consultant had gone into liquidation. As a result, the contractor pursued the consultants’ insurers.

The court took the view that “It was inconceivable that a reasonable businessman would consider that the consultant was voluntarily assuming an unlimited responsibility to the main contractor, or indeed to any party with whom it was not a direct contractual relationship.”

The importance of latent defects insurance:

The case highlights the benefit for main contractors ensuring that everyone in the supply chain responsible for design carries the appropriate insurance.

LDI provides a valuable first-party layer of protection that complements the usual collateral warranties, which are often over relied-on. The reality for all developers, be that residential, commercial, or mixed-use is that they don’t want to be in a position where they have to prove negligence or that a contractor owed a duty of care.

Should there be a valid claim as a result of poor workmanship, materials or a shortcoming in the design phase, the LDI policy is there to protect and enable them, their scheme, and their partners.

Many commercial developers have relied on collateral warranties to satisfy funders and associated parties, but the majority are now more minded to arrange LDI to protect everyone’s interests.

J3 is experienced in advising and arranging the most suitable cover for commercial developments. Our opinion is that Latent Defects Insurance is an essential tool; alongside the collateral warranty- it isn’t an ‘either-or’ situation.

If you have a project you wish to discuss, call us on 020 3096 0718 or fill in our enquiry form online.