Poor construction quality is one reason, but many times the consequences for the businesses that use these buildings can be disastrous: how do you accurately deal with uneven ground due to construction defects several years after a building is completed? These risks are not covered by all property insurance, and there is no insurance to deal with them by then.
Only in recent years have insurers begun to offer insurance against potential defects in building quality. Here we introduce its guarantee content and how it improves the quality of Construction in China.
#1 What is construction quality potential defect insurance?
Inherent Defect Insurance (IDI) has several different names. It is also called potential Defect Insurance or 10-year liability Insurance because it is usually insured for a period of 10 years.
The insurance originated in France, where it has been compulsory for all construction projects since 1978. Building quality potential Defect insurance is designed to protect the owner of a building from the cost of building repairs due to problems with the design and construction of the building. These errors often create problems that don’t become apparent until many years after construction is completed. Insurance against potential defects in construction quality usually covers a building for up to 10 years after completion.
So –
#2 Does all Property Insurance cover such risks?
Many customers assume that Property All Risks insurance (PAR) is sufficient to cover such risks.
All property insurance does cover many risks, such as fire, earthquake, storm and even vandalism. However, all property and Casualty insurance policies need to be triggered by an external cause, so they do not cover claims for inherent or potential defects in the construction of the building.
If the building is not maintained in good condition, it exposes the insured to significant financial risk and many problems can occur: floor slab problems and waterproofing problems are common and standard property insurance does not cover these risks.
#3 Will the general contractor’s construction Insurance policy cover this risk?
The general contractor responsible for the construction is professionally responsible for the quality of the project, and they generally provide warranty protection by providing construction insurance contracts. This may lead us to believe that insurance for potential defects in building quality is not necessary. But the warranty needs to be in place for the next 10 years for the general contractor, and it is not easy to activate if the damage is severe. Then it took years to prosecute general contractors.
Shouldn’t the general contractor’s professional liability insurance cover this risk?
Yes, it can. But occupational liability insurance can cover very little.
First, professional liability insurance is based on claims, so even if you confirm, the general contractor had appropriate professional liability insurance at the time of building your project. However, the general contractor still needs to renew the policy every year for the next 10 years so that the policy can be paid the day the problem occurs.
Even if you can recover through the general contractor’s professional liability insurance policy, there is a lengthy process and expensive legal fees to determine liability for damages. During this time, the building may be left unattended and may suffer further damage.
Insurance policies on potential defects in construction quality do not require proof of compensation for owner’s negligence, so the process is more straightforward and simpler.
Finally, the compensation limits of professional liability insurance policies are, in general, unlikely to reach the level necessary to cover the maintenance costs of large building construction projects. Chinese insurance companies have low underwriting capacity for this type of insurance and are unlikely to reach the total value of commercial buildings.
#5 How does insurance for potential defects in building quality improve building quality?
Given the huge sums involved, insurance companies involved in covering potential defects in construction quality need to follow the project closely from the start to the end. Insurance companies usually employ professional and independent third-party construction risk management agencies to closely monitor the construction situation and issue regular reports to the insurance companies. The resulting insurance policy for potential defects in construction quality will require the construction company to resolve any problems noted during the construction phase. As an independent contractor, the BUILDING risk Management agency only provides reports to the insurance company and provides professional feedback based on third parties to ensure strict compliance with construction requirements. As such, it is a safety barrier for future owners of the building.
In China, insurance for potential defects in construction quality has been made compulsory for many Chinese apartment buildings to protect individual owners in the event of design and construction problems. For commercial real estate, however, such insurance is still rarely bought, despite many obvious reasons. The main reasons are lack of knowledge about such insurance and the cost, which must be paid at the beginning of the project. But protection lasts for ten years, so it is still a reasonable long-term protection.
We expect this insurance to increase and develop well in the coming years.