Traditionally, the insurance market for inherent defects was dominated by a single mutual insurance company, National House-Building Council (NHBC), with around 80% of premium being placed through this mutual, who distributed this product to new homeowners via the building contractor, their member.
Inherent Defects

NHBC’s dominance is now being challenged in respect of both price and cover by newer, insurer-backed players, who have woken up to the potential of the inherent defects market. This new entrant appetite has been particularly whetted by meagre returns from the mainstream construction market due to the current soft cycle.

Changing appetites

Insurer-backed entrants to this class of insurance are increasingly willing to consider more complex risks, for example, cover for existing structures. Traditionally these types of complex risks may have had cover in place, but with significant exclusions, or in some cases, cover may not have been granted, leaving companies without suitable protection in place. It is now possible to create a blended solution whereby the needs of all project stakeholders are addressed in cases where there are particularly complex inherent defect issues in place and where gaps in traditional coverage may have seen brownfield projects stall as the various stakeholders are unable to agree who ought to be the responsible party for inherent defects of an existing structure for which they have no prior responsibility.

Contractors and developers alike can use the market to develop a solution to ring-fence their liability, and that of the respective project stakeholders, in order for a project to progress forward. The building contract itself can also mirror the insurance policy by providing a waiver of subrogation for the contractor or developer, effectively providing them with a safety net that any defects over a certain size (the excess) would be picked up by insurers rather than falling at their door. This hybrid solution then ultimately provides future homeowners, developers and the main contractor, with peace of mind.

Gallagher provided a number of unique solutions to a challenging problem brought about by a complex, sizeable and un-warrantied existing basement, coupled with a superstructure design which involving a complex cladding solution. They presented a number of options for tackling the problem, which in turn allowed us to make an well informed decision when selecting the most effective solution for ourselves the lenders, and the principal contractor.


Case Study

Gallagher developed this solution for a developer, Urban & Civic plc, who had secured planning permission to build three multi-storey (up to 15) towers on a site with an existing 4 storey basement structure (the largest in Manchester) which had lain empty since completion in 2009. The inherent defects market were cautious of providing cover on account of the basement, so Gallagher approached one of the now leading players in the market Building Life Plans (BLP)/ Allianz Global Corporate & Specialty SE (AGCS) to develop a solution to respond to the unique challenges of this site; fine-tuning the wording and ensuring the buy-in of all stakeholders, including lenders and the main contractor.

The contractor was keen to ensure that a workable solution could be purchased by the developer, in the knowledge that any inherent defects in the structure would be covered under, what is, a first-party policy. Our solution therefore provided a waiver of subrogation for the main contractor, and the wording was also written into the building contract itself. Essentially the solution transferred a significant portion of the liability around the existing structure to insurers, thereby ringfencing the contractor, developer and future homeowners’ liability, whilst also ensuring a Council of Mortgage Lenders’ (CML) Approved cover was in place that meant future homeowners will be able to obtain mortgages. BLP/AGCS wrote 50% of the risk with the follow 50% underwritten by Castel, a new entrant Managing General Agent (MGA).

Why Gallagher?

Our Construction division arranges insurance for UK and international contractors and designs bespoke ownercontrolled programmes across a wide spectrum of projects. Our clients range from contractors and engineers, to sponsors, financiers and government local authorities. With our help, project stakeholders can identify, mitigate and transfer risk more strategically. We offer products and services to enable our clients to manage complex risks of all sizes:

  • Construction / Erection All-Risks
  • Delay in Start-Up
  • Pre-handover & Operational Risks
  • Business Interruption
  • General & Third-party Liability
  • Marine Cargo
  • Latent Defects
  • Environmental / Pollution Liability
  • Terrorism & Political risk
  • Mergers & Acquisitions
  • Legal Indemnity.