Inherent Defects Insurance (IDI) provides a long-term warranty against material damage caused by structural defects. Swiss Re offers an IDI product to building owners as well as decennial insurance, a type of latent defect insurance required by law in certain EMEA & APAC countries.
IDI claims predominately manifest in the first 3 years after practical completion. Whilst policy periods may extend for up to 10-12 years, valid claims involving older buildings are less common and more often associated with operational or maintenance issues, rather than defects in the original construction. Older claims still have to be investigated however, and it's not uncommon for disputes to arise between the IDI policy and the current property policy in such circumstances.
Whilst major structural failures or collapses are a possibility, the majority of losses tend to be more mundane. The most common category of claim seen by the author relates to water ingress through the building envelope. Culprits include groundwater penetrating basements or car-parks, or defective rain-screen cladding or roofing systems. Water ingress will often manifest in the first 12-18 months after practical completion, once construction de-watering systems are removed, and the building has "bedded in" and passed through a year's thermal cycle of hot & cold weather.
Other common causes can include poor workmanship from inexperienced operatives working with modern construction methods, or projects which have experienced significant delays or been mothballed due to financial difficulties.
Common Challenges when Adjusting IDI Claims
(1) Record Keeping - The biggest challenge when investigating IDI claims is obtaining accurate records to understand how the building was originally constructed. Record-keeping may be good during the construction-phase (albeit this varies from Project to Project), but getting hold of a comprehensive suite of design, shop or as-built drawings, site diaries, programmes, method statements, variations, OEM manuals, designer's instructions or meeting minutes is very difficult after construction has finished and the Project's participants moved on. The O&M manuals are rarely sufficiently detailed for this purpose.
Claims Lesson Learned: – Details of record keeping systems, or electronic databases, should be made available to Insurers or Technical Inspection Services during the original construction, and copies then kept for the duration of the policy. As a fall back, the location of project documentation, the owners and a means of retrieving it should be ascertained at the start of the policy period if at all possible.
(2) Cover for Imminent, or Threat of, Damage - In addition to a damage-based trigger, IDI policies will often also include cover for "imminent damage" or "the threat of damage". This is potentially a very tricky area, and one which can be the source of disagreement. The extent to which something is likely to happen, or may occur if nothing is done, is often a matter of expert conjecture with no "right" answer.
One scenario is where no damage has been sustained but where it is likely to occur during the 10-12 year policy period if no action is taken. The Insured may be unable to rectify the defect where this would be very expensive or difficult to do, even if they are positively obliged to undertake regular maintenance under the terms of a lease.
Claims Lesson Learned: - This is an area where very careful drafting and use of policy definitions is important, allied with a close understanding of underwriting intention and an ability and willingness to work collaboratively with the Insured when investigating coverage.
(3) Interface with the Defects Liability Period ("DLP") in the Building Contract - Construction contacts usually contain DLP provisions, which require the Main Contractor to return and rectify non-compliant work, where this manifests after practical completion but before a final certificate is issued. These provisions are principally for the benefit of the Employer on the construction contract, and unless the benefit of the contract is assigned (or collateral warranties afford subsequent owners the benefit of suing on the contract), then subsequent owners may be unable to enforce them.
Maintenance Extensions are usually provided under CAR/EAR policies to cover this risk where defects lead to damage – but not solely to repair defects.
From the perspective of the IDI claim, this can pose a number of problems. A contractor may be unwilling to return to site and rectify defects arising during the DLP at their own cost, when the original Employer/Developer has subsequently sold the asset to a third party. Alternatively, if the asset is still owned by the Employer/Developer then it is possible both the commercial IDI policy and the Maintenance Extension under the CAR/EAR policy could be triggered (albeit for competing interests, where the IDI policy doesn't recognise the Contractor as an insured party but the CAR/EAR policy does).
Claims Lesson Learned: – This issue can be dealt with in the policy wording through a well-drafted "other insurance" clause, but beware circumstances where the CAR/EAR policy contains identical restrictions.
Other challenges can be encountered where Insured Project has a complex ownership structure, or where interests which are assigned over the course of the Project or after completion.
The investigation and adjustment of claims arising out of commercial IDI policies can be both complex and time-intensive. Trying to retrospectively delve into a building's pathology, the extent to which it may now be failing, and understanding the reasons behind this so that any "defect" can be ascertained and rectified, requires patience, attention to detail, and often a large amount of expert input. It can also be some of the most interesting work which a claim professional is involved with.
This forensic approach is vital however, both to properly assess cover and to support our customer during a claim situation.
Jonathan Sargent, Head of Property & Engineering Claims, EMEA
4 September 2018
Location: London, UK