Insolvency Today: Brian Kilroy (Business Development Manager at BLP Insurance) explains the difference between new homes warranties and Latent Defects Insurance (LDI) and looks at how simple it is to arrange good cover that can boost a distressed site's sales value.

According to data from a number of industry sources, over 5,000 construction companies in the last two years and around 1,200 real estate companies have been lost; and insolvency practitioners (IPs) are being pressurised to sell distressed sites for as much as possible as quickly as possible - a tall ask in today's uncertain property market. So it's worthwhile to look at the difference between new homes warranties and LDI and how good cover can raise the value of a distressed site when put up for sale.

When a developer or construction company goes into administration with a distressed site there is a daunting amount of paperwork covering everything from planning permission and building regulations through to the new homes warranty/LDI, which are all absolute pre-requisites for home buyers to get a mortgage.

However, changing warranties can be costly and time consuming for insolvency practitioners to arrange as Brian explains: "In the past couple of years I have taken dozens of calls every month from IPs dealing with distressed sites who are unaware that a development with the best LDI cover will be worth considerably more when they sell it and how simple the cover is to arrange - we normally manage the entire transaction in one phone call.

The first question from most IPs usually ask is why does the development need a warranty or LDI? The answer is because the mortgage lenders insist on them to ensure that, if there are any structural defects with the building (for example a fault in the design or construction of the load-bearing portions or weatherproofing of the property) the faults will be repaired. In essence, they are protecting their investment and the value of their property.

Why LDI cover?

The next question is what is the main point of difference between a warranty and LDI?

With a warranty the developer is covered and with LDI the building is insured. It is a fundamental point of difference because it means that, if a problem appears in a new property, the homeowner with a warranty has to prove negligence to the warranty provider.

If the warranty provider is satisfied that there has been negligence, they will direct the developer to rectify the defect (who will pass it on to the contractor responsible for the work). This process is often lengthy and can be fraught with complications when builders and contractors have gone out of business.

With LDI the building is insured. So, if there is a problem, all the homeowner has to do is prove damage and the fault will be repaired (by the original contractor or an agreed supplier) and the whole process normally takes a few weeks leaving the homeowner to live in their repaired property while the insurance company sorts out the liability.

Without a warranty or LDI, a new home is worth absolutely nothing on the open market as it is unmortgageable and the builder/developer will not be able to sell the properties. However, although it is not unusual for a developer to change contractor during a job, it is almost unheard of for a warranty to be swapped from one developer to another.

You would think that, if a site has been built to the correct specification and has been inspected by the warranty provider during the build, it would be easy to simply re-issue the warranty with another developer. Not so. Making amendments to a warranty often proves to be difficult. In the majority of cases, the developer's only option is to take out a completely new policy and, very often, the cover provided is inferior and can even carry penalties for late registration because the works have already started.

For an IP this means that the distressed site's value could be significantly affected because not only has the inferior warranty cost more, but it has also undermined the market value of the completed properties. In today's property market, a buyer will use something like inferior cover as a bargaining tool to get a price reduction and mortgage lenders will almost certainly run shy of anything that adds to their risk.

I am taking dozens of calls every month from developers caught in this situation and nine times out of ten I can help as our LDI policies are all tailored to each site so if any aspect of the development changes, we can change the policy. We do not have registration fees and our sales process is far simpler, which means that even developments that have started (or even completed) can benefit from this cover.

For further information please call Brian Kilroy on 020 7204 2444 or visit

www.blpinsurance.com