In the complex world of property development, understanding insurance is crucial. As part of the Financial Conduct Authority (FCA) regulations, insurance brokers like me are required to communicate in plain language, ensuring that you fully grasp the details of your coverage without being bogged down by industry jargon.
The British Insurance Brokers Association (BIBA) has recognised the challenges that jargon presents and has even created a comprehensive ‘Jargon Buster’ to demystify common insurance terms. You can access this valuable resource here.
When it comes to Latent Defects Insurance (LDI), also commonly referred to as a Building Warranty, the stakes can be particularly high, and understanding the terms insurers and brokers use is essential to making sure the given project has the correct cover.
Whether you’re an experienced developer familiar with these policies or a new development manager just stepping into the role, it’s crucial to know what terms mean and how they can impact your project.
To assist your understanding I’ve created this simple, specialised jargon-busting guide tailored specifically for LDI aka building warranties. This guide aims to help clarify key phrases you’re likely to encounter and ensure you’re fully aware of their implications. After all, knowing the insurer’s definition of “below ground” and why they might request an “IBG”, or understanding the implications of a “builder counter indemnity” or “commercial” versus “residential” policy type, could make all the difference in protecting your investment.
Important terms that you’ll see and hear around LDI and what they mean in relation to your LDI:
| Insurance jargon | What it means on an LDI policy |
| “A rated” Insurer | Refers to the financial strength and creditworthiness of the insurance company, as rated by credit agencies. An “A rated” insurer is considered financially stable and reliable, so it should be able to meet claims. This rating is especially important with LDI policies as these policies run for 10 or more years and must survive the build period. |
| Accommodation Schedule / Schedule of Accommodation | A detailed list of all units within a development. When providing quotations for LDI, insurers want to clearly see all units, floor areas, build costs and sales values in one place. It helps if this document shows any phasing, and it should also include a total for common areas. |
| Administrator or Scheme Administrator | Usually this is the official term for the warranty provider themselves as they are the entity which will administer your policy. |
| Approved Lenders List | A list of financial institutions i.e. mortgage lenders, which recognise the given insurer. Particularly important with residential properties as without a suitable LDI policy/Building Warranty, the property may not be mortgageable. |
| Below ground level / Basement | Parts of the property that will be below the external ground level. These areas could be habitable or may not e.g. car parks or plant rooms. It’s important to check with your insurer how they view that space and whether or not they require additional cover such as Insurance Backed Guarantees (beware of sloping sites or sites built into a hill – a partial basement will also need to be highlighted to the insurer). |
| Builder Counter Indemnity | Depending on the financial strength of the developer/policyholder, the insurer may request the builder/main contractor agrees to accept the responsibility of the defects period. If this is the case, it’s important to understand why and to have these conversations early with your contractor. This could be used to help obtain terms in the first place or it could help to reduce the premium. |
| Certificate of insurance / Final Certificate | This is the official document that confirms the insurance in place and under what terms. It will be issued at the end of the build, when the property has been signed off by building control and the insurer. |
| Collateral Warranty | A collateral warranty is a contract that gives a third party the right to pursue a contractor, sub-contractor, or consultant if they breach their obligations under an underlying contract. The third party may be a funder, purchaser etc |
| Commercial Policies | This is the LDI policy type designed for a commercial project such as offices, warehouses & hotels. Commercial LDI policies, whilst offering essentially the same type of insurance as Residential LDI policies, there are differences in the cover available! Ask an insurance professional to clarify in relation to your project. |
| Common Areas / Common Parts | This refers to shared parts of the building/ development and are often communal areas a policyholder may have joint ownership or legal responsibility for e.g. in a block of flats this would include areas such as hallways, staircases, foyers, plant rooms, bin stores etc. The insurer needs to know the gross floor area of the building including these areas. |
| Completion Certificate | This is the certificate issued by Building Control confirming the building is complete. An LDI policy term will start from the date the building has been “signed off” so insurers will need to see copies of this certificate before they issue their Certificate of Insurance. |
| Consequential Loss | Consequential loss is a type of indirect financial loss which a business may incur due to an insured event e.g. employee injury, damage to property, theft of plant/ equipment etc. Often with LDI policies, Consequential loss is excluded however in some instances dependent on the project and the insurer cover may be available – check with an insurance professional to confirm what is covered. |
| Consumer Code | The Consumer Code is a set of mandatory requirements that developers must meet in the marketing and selling of new homes and their after-sales service. When purchasing a Residential LDI policy, the insurer may request the developer agree to this set of rules. |
| Cover Prior to Completion (Insolvency Cover: Developer Insolvency, Loss of Deposit, Contractor Insolvency, Performance Bonds) | Sometimes it’s possible to include some form of insolvency cover within an LDI policy. Whilst highly sought after, it is tricky to obtain and relies heavily on the financial strength of the entity that requires it. Always check terms and conditions as well as the strength and reputability of the insurer offering this cover. If the LDI policy doesn’t offer this cover; Performance Bonds may be a consideration. |
| Cross Company Guarantee | Depending on the financial strength of the developer/policyholder, the insurer may request that another company agrees to ultimately act as guarantor of the defects period. If this is the case, it’s important to understand why before accepting a quotation on this basis. However this could be used to help obtain terms in the first instance or could possibly help reduce the premium. |
| Defect | You should always read and understand the insurers definition of what defects are covered by the policy. Specific definitions of what is covered are stated within the insurers’ policy wordings. Defects refer to a fault causing or threatening to cause physical damage to the property. Defects are a latent or inherent failure in the design, workmanship and materials relating to the structure of the building. |
| Defects Period | This is the period at the start of the policy (often for 24 months), for which the developer remains responsible for any defects. Depending on the policy type, the defects period may vary so speak to an insurance professional about what options available |
| Excess or deductible | The amount of money a policyholder pays towards the cost of an insurance claim. This is sometimes negotiable and may affect the premium. |
| Exclusion | Exclusions, are terms in insurance policies that limit or restrict coverage for certain types of claims or losses. They can apply to specific situations or events, or they can be more general and apply to a broad range of risks. |
| Existing structure | The insurer will need to know details of any existing or retained structures and they may or may not be covered by the new policy. Ask an insurance professional to confirm their stance on this based on your project. |
| Financial limit or Limit of indemnity | This is the maximum amount of money an insurer will pay out in the event of an insurance claim. Always check the fine print to ensure that your project/property is adequately covered or if it’s incorrect it is likely to cause problems later on. |
| GDV | “Gross Development Value” is essentially the total expected sales value of the development oncecomplete. Most LDI providers are not so interested in this number, but some providers will base their premium on it, so beware. |
| Heave, landslip, settlement, subsidence | See policy wording for actual definition of these phrases. In relation to LDI these perils are often excluded unless the incident is actually caused by a latent defect. |
| Initial Certificate or Conditional Policy Letter or Confirmation of Cover | This document will be issued to the developer by the warranty provider once the premium has been paid. This document evidences insurance is in place. Once the build is complete and signed off, this document will be replaced by the final certificate of insurance. |
| Insurance Backed Guarantee (IBG) | For certain elements of a build such as flat roofing and basement waterproofing, LDI providers may ask for additional security in the form of an IBG for those works. |
| Period of Insurance | In the UK the standard period of duration of LDI is 10 years for residential policies but can be 12 years for Social Housing policies or Commercial policies |
| Reinstatement Cost/Value | This is the cost for full reinstatement cost of the insured assets whether buildings or materials. The reinstatement value is the amount it would cost to completely rebuild an insured property if it was destroyed beyond repair. Costs include the price of labour and materials and may include VAT subject to status, also professional/ architects’ fees, demolition, site clearance and landscaping. Most LDI policies will cover the full professional reinstatement cost of the property and it is this figure that should be noted as the “sum-insured” on the policy. |
| Residential Policies | This is the LDI policy type specifically designed for residential projects – usually subject to a 2 year defects period and other requirements e.g. the developer agreeing to the Consumer Code etc. Make sure you understand what is expected of you to comply with the insurer’s requests. |
| Social Housing Policy | This is the LDI policy type designed for Social Housing or Housing Associations. They are usually 12 years instead of 10 and are subject to a 2-year defects period. As with any policy, make sure you understand what is expected of you to comply with the insurers requests as well as meet the end client’s requirements. |
| Structural Insurance Period | This is the period after any defects period, so if there is a 2-year defects period at the start of the policy, then the structural insurance period will run from year 3-10 (or 3-12). |
| Sum insured | This is the amount that will be shown on the final certificate of insurance and should represent the Reinstatement Value of the property. It is the maximum amount that could be paid out in the event of a total insured loss. |
| Technical Audit /Site Audit | This is the actual, physical inspection or site visit as carried out by a qualified surveyor on behalf of the insurer. |
| Underwriter | This could be referring to the financial professional who assesses the risk of a product or service and decides whether to accept it. The term “underwriter” can also be referring to the institution i.e. insurance company that sits behind your building warranty policy. |
| Policy Types | There are many different policy types on offer in the market such as Residential, Commercial, Mixed-Use, Social Housing, Built to Rent, Self-Build, among other denominations… Whilst these policies may all be “latent” or “inherent defects insurance” products; different insurers offer different policy types to suit different types of projects so it’s important to seek advice from an insurance professional if you are uncertain as to which policy best suits your project. |
If you have any questions or need advice on your upcoming projects, feel free to get in touch with me. I’m here to help you navigate the complexities of insurance and ensure your development is fully protected. Let’s discuss how we can tailor the right insurance solutions for your needs.
Antoni
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