"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."
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 provide 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 shone a spotlight on 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 highlights 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."
Insurance across the board
The case highlights the benefit for main contractors ensuring that everyone in the supply chain responsible for design carries the appropriate insurance.
Employers should insist on latent-defects insurance being in place. This would provide automatic cover for major structural defects, usually for ten to 12 years from the date of practical completion.
LDI provides a valuable first-party layer of protection which compliments 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.
As lenders and funders keep a keener eye on the insurance market, desire for an LDI product will become more prominent on commercial developments that they agree to fund. If developers of commercial schemes aren't already, they should be educating and aligning themselves with advisors who can help them navigate this area of the insurance market.