As a property underwriter, you should know the exclusions of property all risks insurance wording, one of them is what we call as “latent defect”. You can find this type of exclusion in the Special Exclusion on Material Damage Section point 2.5 of Munich-Re wording. It clearly declared that “the insurers shall not be liable for loss, destruction of or damage to the property insured directly or indirectly caused by or arising out of or aggravated by all gradually operating causes, including but not limited to wear and tear, rust, corrosion, mildew, mould, fungus, wet or dry rot, gradual deterioration, latent defect, …”.

But one of us may still confused with word of “latent defect”. What is the proper definition of “latent defect” which also called as “inherent defects” or “structural defects” ?. According to Wikipedia, in the law of the sale of property (both real estate and personal property or chattels), a latent defect is a fault in the property that could not have been discovered by a reasonably thorough inspection before the sale.

“Latent defects insurance” is basically a type of insurance covering buildings against loss or damage caused by defective design, bad workmanship and poor materials used when the building is in the course of construction. The construction process of the building usually begin with foundation, floor, wall, column, roof, etc. Not like property all risks insurance, in the latent defect insurance, when a claim occurred, the insurer need not to prove there was a negligence on building architect or design engineer or the building contractor is in breach of contract.

Coverage is also extend to indemnify for loss of profit as a consequential loss caused by a latent defect. So, this insurance will be useful for the building used as commercial business. Some insurers also now tend to offer latent defects insurance for projects retaining existing buildings and for existing buildings including some cover for non-structural components.

For the main consideration in the underwriting process, the insurers must ensure that the final building is fit and appropriate with specification and building design, also the materials used are good quality and the building was constructed by proper method. To meet this requirements, the insurers need to hire a specialized person (i.e civil engineer and architect) who know deeply the technical aspects in building design and construction, able to check the quality of materials used, and regularly monitor the process of construction from the beginning to the end.