IMIA WGP14 (01)E

INHERENT DEFECT INSURANCE

IMIA CONFERENCE

SYDNEY

SEPTEMBER 2001
MEMBERS OF THE WORKSHOP

Guy VAN HECKE – Chairman France – AXA CORPORATE SOLUTIONS

Ugo PINO - Italy – NATIONAL VULCAN

Augustin MARTIN MARTIN - Spain - ALLIANZ

Hans GEWALT - Germany - GERLING

Alan HARRIS - United Kingdom – ALLIANZ CORNHILL

Represented by Duncan SOUTHCOTT

PERSONS HAVING CONTRIBUTED TO THE PAPER

Michèle CROS - France – AXA CORPORATE SOLUTIONS

Jean TUCCELLA - France – SCOR

Jean Marie de VASSART D’HOZIER - France – AGF

Hugo MEEWENS - Belgique – AXA ROYALE BELGE

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 INDEX

INTRODUCTION 5

I– COUNTRIES WITH LEGAL BUILDER’S LIABILITY

AND WITH COMPULSORY DECENNIAL INSURANCE 8

1 France 8
2 Spain 11
3 Italy 14
4 Finland 17
5 Australia – Victoria 18
6 Canada – British Columbia 19
7 USA – New Jersey 20
8 Other Countries : Algeria, Saudi Arabia, Gabon, Cameroon,
Congo Brazzaville, Mali, Morocco, Centrafrica, Tunisia 21

II – COUNTRIES WITH LEGAL BUILDER’S LIABILITY,

WITHOUT COMPULSORY DECENNIAL INSURANCE BUT
WITH INHERENT DEFECT INSURANCE MARKET 22

1 Belgium 22
2 United Arab Emirates 23
3 Japan 24
4 Kuwait 25
5 Senegal 26

III – COUNTRIES WITH LEGAL BUILDER’S LIABILITY,

WITHOUT COMPULSORY DECENNIAL INSURANCE AND
WITHOUT INHERENT DEFECT INSURANCE MARKET 27

1 Argentina 27
2 Canada – Quebec 28
3 Netherlands 29
4 Iraq 30
5 Jordan 31
6 Philippines 32

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IV – HOW TO UNDERWRITE INHERENT DEFECT
INSURANCE 33

1 INHERENT DEFECTS INSURANCE POLICY 33

2 TECHNICAL INSPECTION SERVICE 34
3 WHAT KIND OF CONSTRUCTION CAN BE INSURED ? 35
4 UNITED KINGDOM 35

CONCLUSION 37

Addendum : Example of an Inherent Defect Insurance

wording 38

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INTRODUCTION
The main purpose of the paper is to make a comparative study of the current
situation in respect of compulsory decennial insurance , where it exists as in France ,
Spain , Italy … and Inherent Defect Insurance in other territories ( such as Belgium)
where there is no obligation by law but an active market to offer latent defects
insurance on certain projects.

Ever since the birth of humanity, people have devoted a large part of their efforts and resources
to protecting themselves against the elements – rain, snow, wind and/or sun – which explains
why homes have always been a fundamental possession during a lifetime and even beyond.

About 3.500 years ago the Hammurabi – King of Babylon - Code ) was well aware of how
important their homes were to his subjects and proclaimed a law laying down the stictest
penalties for incompetent builders :

. if the house that has beeen built collapses and kills the owner, the Architect shall be punishable
by death
. if the contents have been destroyed, he must restore what has been destroyed and, because
he did not make the building strong and it collapsed, he must rebuild the house at his own
expense… »

Many years later in France, when the Civil Code was established (1804), liability specific to
builders was defined :

Article 1792 : «If the building constructed for a fixed price is destroyed completely or partially
through a structural defect, even resulting from a flaw in the ground, its architects
and builders shall be liable for ten years.»
Article 2270 : « After ten years, the architect and the builders shall be released from guarantees
associated with construction works which they have undertaken or of which they
were in charge. »

In the whole world, builders, in order to satisfy their clients, have tried to make sure that their
works lasted after they were gone, or even for eternity - witness the Pyramids in Egypt, the
cathedrals in Europe, temples throughout the world.....

Through the centuries builders have usually used time-honoured construction methods without
much innovation.

Nevertheless each building remained a prototype, because as it was finalized during its
construction. The conditions under which it was built differed on each occasion (soil conditions,
principals requirements, climate...). A prototype which was produced moreover not by a small
team, but by a whole host of individuals who had to be co-ordinated by the architect.

But with the recent world population explosion, demand for housing, infrastructure and industrial
plants has grown apace and the land area naturally suited to building has shrunk. On top of this,
as general living standards have risen, people have come to expect higher standards of comfort
and safety. Consequently, builders have had to come up with imaginative solutions to new
technical problems and design new materials to meet these new demands.

It follows that the higher technical level of new construction projects makes them more
vulnerable to deterioration over time and their owners sometimes find themselves in dire straits
when their property has to undergo radical repair or rebuilding.

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Modern Buildings

The doubling of the world population over the past 50 years and the economic growth in many
countries (in the thirty post-war years for the OECD countries and more recently for the Asian
economies) have greatly expanded the need for housing,industrial plants and infrastructure.

However, most good building land – sheltered sites on rocky terrain and large expanses of flat
ground – has already been occupied. The sites « chosen » today may need major earthworks,
special foundations or drainage. In some places, economic necessity has forced developers to
reclaim land from the sea, as in the case of Hong Kong airport. This means that the foundations
for new buildings require more sophisticated and therefore more risk-prone technology, such as
extremely deep piling.

High demand for buildings means they have to be erected more quickly, while at the same time
providing the improved quality required by consumers. Builders have therefore had to develop
new materials to meet these challenges. One example is reinforced concrete, invented at the end
of the nineteenth century, which replaced stone vaulting, wooden roof beams and brick walls ;
and which in its modern, increasingly high-performance versions enables builders to reduce the
thickness of loadbearing walls and cut construction times.

A number of other materials have been introduced to meet economic needs and satisfy
consumer demand, such as curtain walls and heat and sound insulation, but many of them have
not been in use long enough to say how durable they will be.

When we talk of a new building, we can often say it is a prototype, or at least a one-off
construction, with all the consequences that this implies. Each building requires an individual
study taking into account its location and the loads it will have to bear throughout its lifetime.
Innovative construction methods and new materials, or standard products used in a non-
traditional way, will be used to meet architectural requirements or economic needs. An example
is the Grande Arche at La Défense, Paris, which was built using a revolutionary construction
method and high-strength concrete, with thin marble sheet cladding, a first use of this material
on such a large scale.

When we talk of a new building, we can oftern say it is a prototype, or at least a one-off
construction, with all the consequences that this implies. Each building requires an individual
study taking into account its location and the loads it will have to bear throughout its lifetime.
Innovative construction methods and new materials, or standard products used in a non –
traditional way, will be used to meet architectural requirements or economic needs.

Moreover, in contrast to the way prototypes are produced in other industries, such as car
manufacturing, a new building is often the product of a large number of different trades, each
employing workers who are often low-skilled and transient, and sometimes working in bad
climatic conditions, consequently the probability of achieving zero-fault performance in the
building industry is virtually nil, even if the contractor has employed all the resources he thought
necessary to do the job well.

After looking at buildings from a technical point of view, we will now consider how their future
owners regard them. Whether they are having a house, office block or factory built, the primary
consideration is cost. Any building is first and foremost an important financial commitment that
will be amortized over the long term. Once the work is finished, any major fault in the building
can become an unbearable financial burden and may, in extreme cases, lead to bankruptcy. It is
in the owners' interest to protect themselves against major construction faults because even if

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they are not responsible for causing the defects, but they will always have to bear the
consequences.

Today more than ever before, principals can find themselves in a difficult position :

•= every construction operation generates a risk of defect which cannot be ignored ;

•= making good such defects can prove very costly (the possible « savings » realized during
the erection of the building and the actual cost of the repairs which neither the builder nor
the owner can perhaps bear, are out of all proportion to one another).

All of these reasons have caused the legislators, at least in some countries, to lay down some
very precise rules for builders.

For example, specific builders’ liability over a period of 5 or 10 years :

•= Belgium : art. 1792 and 2270 ofthe Civil Code

•= Brazil art. 1245 of the Civil Code
•= Canada art 1688 of the Civil Code
•= Colombia art 2060 3a of the Civil Code
•= Spain art 1591 of the Civil Code
•= Philippines art 1723 of the Civil Code
•= Saudi Arabia Decree m14 of Mach 27th 1977 (7.4.1397 A H)
•= Tunisia Law 94-9 of January 31st 1994

This list is obviously not exhaustive. The Victorian Building Act of 1993 in Australia as well as
legislation in Queensland and New South Wales is also worthy of mention.
In other countries, builders are subject to general rules as regarding their liability.

But very few countries require them to insure against their liability. Those that do include France,
Sweden, the State of Victoria in Australia, Tunisia, the State of New Jersey in the USA, the date
of British Columbia in Canada, Finland from September 1st, 1998, Spain from November 5th, 1999
and Italy from July 27th, 2000.

The problems encountered by the principals in the event of damage to their buildings, as
outlined in this paper, thus remain unresolved in most countries.

In most cases those responsible for defects in a building are those involved in its construction
(architects, design consultants, contractors and manufacturers), either because of faulty design,
poor workmanship, low-quality materials, incorrect use of materials, or a combination of the
above.

In the event of damage the first step is to contact the company responsible for the defect and
request rectification of its errors or bad workmanship. But this is not always possible, as the
company may no longer exist, and even if the contractor is still in business he may not have the
resources or the willingness to remedy the defect. To overcome this problem it may be
worthwhile to insist on builders taking out liability insurance to cover their activities. But legal
liability policies generally exclude the defective structure itself and cover only consequential loss,
and require the owner to provide proof of negligence. This solution may be logically sound
(those responsible for damage to a building must be insured), but it leaves the owner of the
defective building with a few problems.

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He must first of all establish who is responsible for the loss, which is not always easy and can
take some time. There may be several levels of liability, resulting in a battle to apportion the
blame, which is often taken to court and is in any case a long-drawn-out affair. During this time
the damage will not have been repaired.

Even then it is not certain that the contractor found liable will still be in business, that he is
solvent or that he is still insured. Finally, cover limits may prove inadequate to carry out all the
repair work needed.

To overcome the above difficulties, the owner may choose to take out a policy covering him
against loss due to major structural defects over a sufficiently long period : that is Inherent
Defect Insurance.

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I – COUNTRIES WITH LEGAL BUILDER’S LIABILITY AND WITH
COMPULSORY DECENNIAL INSURANCE

1 FRANCE
LEGAL ENVIRONMENT

In France, the Civil Code gives a legal system for decennial liability: There are the articles 1792 &
2270.
This liability concerns the builders i.e. the contractors, the architects, the engineers and the
manufacturers.
It applies to all types of construction works.
It is a strict liability for ten years (art. 1792-1) from practical completion. This liability targets
structural defects or non-structural defects if works are “unfit for their intended purpose”.
In addition, there is a guarantee of 2 years from practical completion of the works for building
(art. 1792-3) equipment defects.
From 1978, the French insurance Code says that this liability must be insured by a compulsory
insurance for building works. Moreover, all developers and owners must also take an insurance
policy for the decennial damages.

INSURANCE

•= The principals (owners)

The Insurance policy for the principals is a first party policy for damages for which builders
are legally liable according to the art. 1792 of Civil Code but not according to the art. 1792.3
No deductible applies. There are very strict settlement dead lines : 30 days for the first
report and 90 days for the payment from claims advice.
The loss limit is the total cost of the construction.
•= The builders
The Insurance policy for the builders is a third party liability policy for their legal liability
defined by the art. 1792 of the Civil Code but not by the art.1792-3.
The loss is wholly paid to the third party, then the insurer recovers the deductible from the
builder.
There is no settlement dead line but there is an agreement between insurers for settlement
of claims.
The usual loss limit is M Euro 10 for contractors and is M Euro 1.5 for engineers.

This compulsory insurance works in two triggers :

The first one is the owner damage cover.

The principle is to pay first in order to protect the consumer interests, before any search for
liability.
The second one is the contractors/engineers liability insurance in order to maintain
contractors/engineers involvement.
Moreover, there is an obligation for the agreed by the state insurers to insure. (Quotation
Committee).
If for any reason, all insurers refuse the risk, there is a special Quotation Committee that gives a
quotation and names an insurer.

POLICY WORDING

As we have said above, there are 2 types of policies :

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•= Dommage ouvrage (DO)
The insured is the principal of the building
“Authorised” exclusions are
- fraudulent acts, theft
- external causes : fire, earthquake, …
- normal action of the time
- war

The loss limit is the total cost of the works with full indexation

•= Liability cover
It is the contractor liability according to art. 1792
The insured is the builder
The “authorized” exclusions are - external cause : fire, earthquake
- war
- rules of art (not opposable to third party)
There is no compulsory loss limit.

In fact, there are different forms of policies :

•= DO (Dommage Ouvrage) is always issued for a single project cover

•= “Constructor liability” is issued either on annual basis
•= “PUC” (police unique de chantier) is issued for one specific single project including both
“Dommages Ouvrage” plus “Contractor Liability” in the same policy.

EXPERIENCE

Since the French law has been designed, insurers have been confronted with many difficulties.
•= The scope of the cover is not totally defined and relies on the courts interpretations
What is a building?
What is the meaning of “unfit for its intended purpose"?
•= The absence of deductible encourages a claim attitude
•= The liability deductible is not opposable and makes insurers dependent from economic
situation
Those changing parameters make very difficult the assessment of the risk and the calculation of
the long insurance period.

In addition
•= Courts interpretations make the cover broader and broader

It is good consumer’s protection but up today a non profitable product for insurers.

STATISTICS

From 1983 to 1996, the total market premium was MMUS$ 8. The total market losses were
reported up to MMUS$ 2. Since 1994, the increase of average rate has been 50 %. In average,
the increase of claims was 10 % per year since 1983. The number of claims closed without
payment was 50 %. But those claims were adjusted by construction loss adjusters, and fees
were paid.

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 The costs can be split according to the parts of the building
•= Structural works : 60 %
•= Non structural works : 35 %
•= External works : 5 %

These figures are according to the specificity of the French cover and according to the specific of
the French professional organisation. They cannot be easily extrapolated to other markets.

•= Contractors with professional classification

•= Products agreed by technician (norm/Technical Advice) and reviewed by insurers
•= Quality control in factory and on site
•= Technical inspection

Responsibility

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Architects Contractors Engineerin Manufacturers Principals TIS
g Firms

Main Responsibility Secondary Reponsibility Total Responsibility

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2 SPAIN
Law 38/1999, 5th of November – Building arrangement. Valid from 5-5-2000

The goal of this law consists in regulating the construction process taking into account the
essential aspects. Therefore, the obligations and responsibilities of the operating agents are
established as well as the warranties that are necessary for its development, assuring the quality
by fulfilling the basic requirements of the buildings and protecting appropriately the interests of
the consumers.

Scope of application: The construction, i.e. the action and the result of constructing a building of
public or private permanent nature:

For the purposes of this law, the following concepts will be considered as construction:

•= Works of new buildings

•= Works of extension, modification, renovation or rehabilitation that change the
architectural configuration of the buildings. These works are considered as such provided
there is a complete intervention or a partial one that produces an essential change of the
general exterior composition, volume, or the whole structural system, or changes in the
characteristic use of the building.

Basic Requirements of the construction

Regarding functionality:
•= Utilisation
•= Accessibility
•= Access to service items

Regarding security:
•= Structural security
•= Security in case of fire
•= Use security

Regarding habitability:
•= Hygiene, health and environmental protection
•= Noise protection
•= Energy saving and heat isolating

Time Terms:
The calculation of the liability and warranty terms established by this law would begin from the
date on which the certificate of acceptation is issued.

Construction Agents
The principal, the planner, the constructor, the director of the work site, the building owner, the
quality control entities and laboratories of the construction, the product deliverer, the consumer.

Liabilities and Warranties:

Liability of the agents taking part in the building process:

The persons taking part in the construction process will be liable:

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During ten years: for the material damages due to fault or defect in the building that might
affect the basement, the beams, the walls and other structural elements as well as those
affecting directly the mechanical resistance and stability of the building.

Compulsory insurance

Material damage insurance in order to guarantee the material damages caused by fault or defect
to the building, provided that these faults are originated or affect the basement, the beams, the
walls or other structural elements, affecting directly as well the mechanical resistance and
stability of the building. This insurance will cover a period of ten years. As soon as the law is in
course, this warranty can be requested for buildings designed principally for housing.

Insurance Conditions:

Policy holder: The principal.

Insured: The principal and the following owners of the building in whole or in part.

Premium payment: The premium should be paid at the moment the work is finished.

Due date: 10 years, without possibility of cancellation.

Sum Insured 100 % for structural damages, on the final cost of the material execution
of the construction, including the professional fees, licences and taxes.

Deductibles: 1 % of the risk values at the most.

The following concepts are excluded:

•= Physical injuries or other economical damages different from the material damages
guaranteed by Law.
•= Damages to buildings adjoining or adjacent to the building.
•= Damages caused by changes or other works carried out in the building once the certificate of
acceptance has been issued, except for the works to repair the known defects.
•= Damages caused by bad use or inappropriate maintenance of the building.
•= Expenses for the maintenance of the building once the certificate of acceptance is issued.
•= Damages caused by fire or explosion, provided there is no fault or defect to the installations
of the building.
•= Damages caused by accidental cause, force majeure, act by third parties or the person
harmed by this damage.
•= Claims due to parts of the construction about which some reserves are recorded in the act of
acceptation, while they are repaired and the repair works are recorded in the new act of
acceptation signed by the signers of the previous act of acceptance.

Before the effective date of the policy, the Insurer will have to receive the following documents
from the Policy holder or the Insured:

•= Final report issued by the Technical Control Body.

•= Certificate of Acceptance
•= Declaration about the find value of the insured goods.
•= Total premium.

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From the effective date of the policy, the Policy holder or the Insured should inform as soon as
possible the Technical Control Body and the Insurer about all the circumstances that might
aggravate the risk.

The Insurer will be allowed to cancel or modify the insurance policy within a time period of one
month, from the day of the risk aggravation advice.

Additional coverage beyond the Law:

•= Watertightness of the roofs
•= Watertightness of the walls
•= Watertightness of the basement
•= Damages in previously existing buildings.
•= Automatic adjustment revaluation of the insured sums and deductibles

Technical Inspection Service (TIS):

Company engaged by the Policy holder and agreed by the insurer. The fees and expenses of this
Technical Control Body are charged to the Policy holder.

Tasks to be carried out by the TIS:

•= Examination and control of the construction project, including its modifications.

•= Control of the construction from the beginning, including possible modifications.
•= Issue of the necessary technical reports.
•= Presentation and signature at the commissioning date, with the indication of possible
technical reserves.

Characteristics of the TIS:

•= To have independence from the agents involved in the construction process (engineers,
constructors, manufacturers, financing agents).
•= Professional experience, as well as a sufficient technical and qualified team.
•= Sufficient Professional Liability Insurance

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3 ITALY

Merloni Memorandum

On the 27th July 2000 the so called Merloni Law became effective . This set of regulations applies
to public contract works and introduces a number of very significant changes in the insurance
requirements which include bonding , construction , decennial liability and designers’ professional
indemnity .

In the area of technological classes , it has become compulsory for contractors being awarded
public works to stipulate certain insurance policies and namely :

1) Construction All Risks for the full contract value of the works including cover for loss and
or damage to Principal’s existing property ( loss limit not indicated ) ;
2) Cover against General Third Party Liability for a limit equal to 5% of contract value up to
a maximum of EU 5,000,000 ;
3) First Party Decennial Liability Policy for a limit not lesser than 20% of contract value but
not exceeding EU 14,000,000,
4) Third Party Decennial Liability Policy with a limit of not less than EU 4,000,000 .

The law states that insurance will not include loss and or damage caused by 1) “Force
Majeure”
2) Third parties.

Comments on CAR

There is already evidence that , in the majority of instances , Principals will request that
contractors insure on a wider basis than that compulsory by law and insurance conditions will
tend to reflect those commonly used in the market ( i.e. without the above mentioned
exclusions).

The policy wording recently submitted by A NIA to the Ministry in respect of CAR insurance,
contains a clause whereby any policy deductible will be applicable to the Contractor only ,
the Principal being entitled to full indemnity . This may present insurers with a problem in the
event of the contractor becoming insolvent during the course of construction and after the
occurrence of insured losses . However it must be kept in mind that only certified contractors will
be allowed to participate in public tenders . Besides , the very onerous bonding regime will
entail insurers to investigate the financial soundness of contractors more carefully than in the
past before giving cover.

Comments on Decennial Liability

The Ministry for Public Works have decided to set the limit above which decennial liability
insurance becomes compulsory for public contracts at EUR 10,000,000 . This will result in only
the larger projects being insured and therefore this section of the law producing a substantially
lower premium income than anticipated .
The scope of the cover is “ named perils “ , property type ( first party ) modelled on the
contents of art. 1669 of the italian civil code which is in respect of structural components of
civil works constructed for long duration . The policy wording submitted to the Ministry
contains a more detailed qualification in that it refers only to “ partial and / or total collapse
and important constructional defects suffered by component parts of the works

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subjected to static testing in accordance with law 1086/1971 (subsequently modified as
per final policy wording).
In essence it is a far more restricted cover than that commonly applied in the French market and
reflecting the requirements of the Spinetta Law which extends to virtually all parts of
constructions .
As regards technical controls , the National Insurance Association , through its technical
committees, has started a project in cooperation with UNI ( standard of material and
construction certification ) and SINCERT ( certification of technical controllers ) with a view to
establishing procedures and standards of control in respect of different categories of works ( by
size , nature , complexity , materials used , construction processes etc . ) . For simple and low-
valued projects , technical controls will be limited to those effected by the Principal to comply
with its administrative obligations , insurers being entitled to examine the contents of the
certificates issued by the appointed controllers .

As regards the private sector , demand for decennial liability insurance is growing in the wake of
the introduction of the Merloni law as Principals tend to regard the stipulation of this cover as an
additional guarantee against the risk of having to repair or replace defective structures failing to
recover from the responsible party ar a result of insolvency or pending long-drawn-out
litigations.

A NIA ‘s (NATIONAL ASSOCIATION OF INSURERS) projections indicate an annual premium

volume of approximately EU 250,000,000 generated by the introduction of Merloni Law for all
classes of insurance ( bonding , CAR , decennial liability ).
It can be expected that the requirements of the Law will gradually be translated into contracts
between private parties so creating a strong link between construction and decennial liability
insurance .
Due to the lack of previous experience in the market , it is difficult to forecast technical results
for decennial liability insurance as the number of unknown factors ( prevailing levels of rating ,
volume of business , effective application of technical controls , composition of the portfolio etc .
) is very great . Professional reinsurers with established experience of this class in other markets
( particularly Swiss Re and Munich Re ) tend to believe that , given the known starting
conditions , the experience should be sustainable in the long term.

Some additional aspects worth mentioning and namely :

The policy wording has been approved by the competent Ministry ( Public Works) after
extensive consultation with the National association of Insurers (ANIA) .
1. Cover attaches upon issuance of the Provisional Acceptance Certificate ;
2. The policy is stipulated by the executor of the project for the benefit of the Principal ;
3. Technical control will make sure that contract works have been realized in compliance with
the standards of UNI CEI ISO 45000 ( a condition of liability under the policy );
4. Grave constructional defects are defined as those which affect parts of the project intended
for long duration and effectively endangering the stability or safe access to the property
declared by the competent Authority ;
5. The subject matter of the cover is limited to structural components of the project constructed
for long duration and apt , by their nature , to stand static and dynamic stress ;
6. Non structural components , such as waterproofing , finishings , thermic and acoustic
insulations , technological plants and the like , are not included in the cover .

Scope of the Cover

The policy covers loss and or damage to the subject matter insured (complete project) for a
period of 10 years from the date of provisional acceptance , caused by:

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1. total and/or partial collapse of the project;
2. important constructional defects affecting structural components intended for long duration ,

providing such loss and/or damage is a consequence of a constructional defect or an error in the
executive plan/design.

Standard Exclusions

1. defects known before the attachment of the policy ;

2. loss and/or damage consequent upon modifications carried out after the date of provisional
acceptance causing phisical alterations to the structures ;
3. fire , lightning , explosion , collapse , electrical phenomenon unless caused by structural
latent defects as defined above ;
4. “force majeure”
5. defective and/or insufficient maintenance ;
6. gross negligence of the insured , the user or the persons for whom they are responsible ;
7. expenses incurred to identify the loss , unless specifically insured against ;
8. loss resulting from overloading or the application of conditions beyond the project’s
tolerance.

Technical Framework

The application of the new rules for decennial liability attaching to the construction of public
works is set within a framework of technical controls and requirements which involve the
certification of general contractors by specially appointed technical bodies (SOA) in relation
to the size and complexity of the projects to be executed , the analysis of design , materials
and construction methods to insure compliance with the required standards carried out by
licensed technical controllers , periodic checks during construction , and the
participation of insurers in the process to apply appropriate levels of control and mitigation of
exposure during the insurance period .

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4 FINLAND
Housing transaction act – 1998

In Finland, there is an obligation to insure the decennial liability. The beneficiary of this
insurance is the owner. It is a liability for 10 years. First of all this insurance is an insurance for
insolvency but optionally the policy can cover inherent defect without insolvency.
The main difficulty met by the market is the insufficient quality control during building.

This insurance is compulsory for the principals. This is a third party insurance.

The insurable projects are houses. The buildings sites are reviewed by a controler from the
insurance company.

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5 AUSTRALIA – Victoria
Building act 1993 K- N° 126 of 1993

In this Australian state, there is an obligation of insurance for decennial liability.

Art 135 – Order requiring insurance
1. The Minister may, by order published in the Government Gazette :
a) require building practitioners in specified classes of building to be covered by
professional
indemnity insurance, a performance bond or other liability insurance or insurance
scheme
and :
b) specify the kinds and amount of insurance by which building practitioners in each
specified class are required to be covered.

3. An order under sub-section (1) must state the date of taking effect of the order which must
not be
earlier than one month after the date of publication of the order in the Government Gazette

4. The Minister may revoke an order made under sub-section (1)

5. The Minister may consult with the Building practitioners Board before making an order under
this section.

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6 CANADA – British Columbia
Home owner protection act

Developers and contractors must write a policy for their liability.

A person must not build, offer for sale or sell a new home unless the new home is covered by
home warranty insurance provided by a warranty provider.

Home warranty insurance for a new home must provide coverage for :
A) Defects in materials and labour for a period of a least 2 years after the date on which the
warranty begins
B) Defects in the building envelope, including defects resulting in water penetration, for a period
of at least 5 years after the date on which the warranty begins, and
C) Structural defects for a pariod of at least 10 years after the date on which the warranty
begins

If required by the regulations, a person must not undertake a renovation or offer for sale or sell
a renovated home unless the renovation is covered by home warranty insurance provided by a
warranty provider.

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7 USA - New Jersey
New home warranty and builder’s registration act.
Chapter 25 July 1st, 1979

This compulsory insurance covers the liability of developers and contractors regarding the
individual homes.

Registration required

No individual, partnership, corporation or other business entity shall engage in the business of
constructing new homes unless registered with the Departement in accordance with this
subchapter.

Enrollment in a warranty plan

Each builder or building business entity shall, at the time of registration, indicate on the
registration form the warranty plan in which that entity is enrolled or chooses to be enrolled. No
builder or building business entity shall be issued a certificate of registration unless they have
enrolled or have applied for enrollment in either the State Warranty Plan or a private warranty
plan.

Warranty coverage

The warranty made applicable by these regulations shall be as follows :

1) One year warranty : for a period of one year from the warranty date each new home shall be
free from :
- performance standard defects
- appliance fixture and equipment defects
- mechanical and electrical systems defects
- major structural defects
2) Two year warranty : for a period of two years from the warranty date each new home shall
be free from :
- appliance, fixture and equipment defects only if such defects are covered under a
manufacturer’s warranty
NOTE : No warranty for appliances, fixtures or equipment shall exceed the length and
scope of a warranty offered by the manufacturer.
- Mechanical and electrical system defects
- Major structural defects
3) Ten Year warranty : for a period of 10 years from the warranty date each new home shall be
free from :
- major structural defects

Builder responsibilities

Each builder shall be responsible for the correction of any defect which appears during any of
the warranty period specified in this section, unless such responsibility is otherwise assumed by a
private plan of which he is member. Participant to the State Plan shall be responsible for
correction of defects for the first two years of the warranty.

The builder’s responsibility in the case of a defect covered by this warranty shall include removal
of the defects by repair or replacement or payment of the reasonable cost of repair or

21
replacement. The builder’s responsaibility shall include actual reasonable shelter expenses during
repair.

22
8 OTHER COUNTRIES

ALGERIA
Art. 554 Civil Code 1975
The architect and the contractor are jointly liable for 10 years for any total or partial destruction
even in case of ground default.
This liability is extended to inherent defect within the structure of the building.

SAUDI ARABIA
Royal Decree n° M/14, date 7/04/1997
Art. n° 121
The contractor shall stand answerable for a period of ten years, for any collapse, whether total
or partial, that may occur as a result of defective execution, in the buildings or other permanent
structures erected by him, unless it is contemplated in the contract that such buildings and
structures shall serve for a period of less than ten years. The guarantee hereunder shall cover
such defects as may appear in the buildings and structures and threaten the strenghth and
safety of the construction.
The ten-year period referred to shall start to run as of the time of delivery of the work. However,
if any collapse occurs or any defect is discovered and the soliciting agency fails to invoke the
guarantee within a year from such occurrence of discovery, it shall forfeit its right to institute any
action against the contractor in this respect.

GABON
Decree N° 62 from Insurance National Department
Art 1
This article says that all state works have to be insured. The coverage includes the cover « unfit
for its intended purpose ».
Art 2
This is a decennial cover with a 2 years cover for equipments.
Art 3
The Technical Inspection Company is insured in the same policy.

CAMEROON
Art. 1792 – 2270 Civil Code
Similar to ALGERIA

CONGO – BRAZZAVILLE
Act n° 77/318 dated 17/08/77
Similar to ALGERIA

MALI
Act n° 79-27/CNLN
Similar to ALGERIA but just for the contractor (not the architect)

MOROCCO
Art 769 modified (Dahin dated 9 ramadan 1331) Civil Code
Similar to ALGERIA but also for the engineers.

CENTRAFRICA
Act n° 83 053 dated 02/08/83 and decree n° 84.129

23
Similar to MOROCCO

TUNISIA
Art 1 – Law n° 94 – 9 dated 31/01/94
This law applied to architects, contractors, engineers, controlers, developers for 10 years.

24
II - COUNTRIES WITH LEGAL BUILDER’S LIABILITY, WITHOUT
COMPULSORY DECENNIAL INSURANCE BUT WITH
INHERENT DEFECT INSURANCE MARKET

1 BELGIUM
Insurance of the architects and contractors liability with technical control – « Insurance –
Control ».

GOAL

The goal of this insurance is to cover

- the liability of all builders participating in the erection of a project including the
decennial liability towards the owner.
- Damages to the project in course of erection consequence of its collapse or important
defects that could lead to its destability.

COVERS

•= During the construction

A1
Damages consequences of a collapse or threat of collapse
A2
Constractors liability to the owners or other third party due to the building works

Owner’s liability towards third party due to the buildings works

•= After the commissionning

B1
decennial contractors liability
B2
Contractors and owner’s liability to the reprations made in case of loss paid in B1
B3
B1 extension to existing property before erection of the new project and non material
Damage

PARTICULARITIES

•= Compulsory control made by SECO

•= All builders are insured
•= It a policy for a single project
•= The cover is maintained for 10 years even if one contractor should go bankrupt

BELGIAN STATISTICS

Number of claims : Structural works 30 %

Roof structures 15 %

Type of claims : Humidity 22 %

Surface alteration 20 %

Origins of claims : Design : 30 %

Workmanship : 23 %
Material : 23 %

The Belgian market represents around MM US$ 0.5

25
2 UNITED ARAB EMIRATES
Federal law N° 5 dated 1985 – Art. 880

1) If the tender’s agreement is to construct buildings or other immovable constructions

designed by a consultant engineer and executed by a contractor under his direct supervision,
they shall be jointly liable to compensate the tender’s beneficiary throughout a ten year
period for any total or partial destruction to any of the buildings being constructed or any
construction being erected and for any defect endangering the safety and firmness of the
building if the contract does not otherwise include a longer period, and this shall all continue
unless both parties desire that such constructions shall remain be for a period of less than
ten years.

2) The liability to assume the asserted compensation shall remain even if the law would result
from a defective condition in the land itself or if the tender’s beneficiary has agreed to
construct the defective buildings or constructions.

3) The ten years period shall start from the date of completion of work.

26
3 JAPAN
Art 533, 634 and 638 Civil Code

House quality and warranty law (dated 23/06/99)

One of the parties to a bilateral contract may refuse performance of his own obligation until the
other party tenders performance of his obligation ; however, this shall not apply where the
obligation of the party is not due.

If any defect exists in the subject-matter of the work the person who ordered the work may fix a
reasonable period and demand from the contractor the rectification of such defect ; however,
this shall not apply if the defect is not material and its rectification would involve excessive
expense.

The person who has ordered the work may demand compensation for damages in lieu of or
together with rectification of the defect ; in such cases the provisions of Article 533 shall apply
mutatis mutandis.

A contractor for a strucure to be erected on land is liable for warranty in respect of any defect in
the structure or in its foundations for a period of five years after delivery ; however, this period
shall be ten years in the case of a structure made of stone, earth, brick or metal.

If the structure is destroyed or damaged by reason of a defect as mentioned in the preceding

paragraph, the person who ordered the work shall exercise the rights mentioned in Article 634
within one year from the time of such destruction or damage.

The house quality and warranty law has been voted at the Diet on the 23th of June 1999 and is
in course from 1st of april 2000. This law, which modifies the contractors and sellers liability in
the residential sector, contains three points :

1) a ten year liability for contractors and sellers. This liability is for defects in structural elements
of houses plus in elements that can protect houses against rain.
2) Implementation of new standards of houses construction
3) Rating of the houses made by inspection companies agreed by the state to measure the
quality (earthquake, sound, fire). The rating is not compulsory.

27
4 KUWAIT

Art.692 to 697 Civil Code n° 67 of 1980

Art . 692

1) Both the Contractor and the Architect shall guarantee any total or partial collapse of failure of
the buildings and fixed installations which they have constructed for ten years as from the
date of completion of such building or construction, subject to the following Articles.

2) Nevertheless, if it is established that the contracting parties intend for the buildings or
installations to last for a period of less than ten years, the guarantee shall be extended for
this period only.

3) The guarantee shall include the collapse even if it results from a defect in the ground
involved or if the Employer has permitted the construction of the defective buildings and
installations. It shall also include any defect that may appear in the buildings and installations
resulting in a threat to their consistency and safety.

Art . 693

1) Where the work of the Architect is limited to drawing up the design of the building or
construction or part thereof, he shall be responsible for such defects as are attributed to the
design he drew up, excluding defects in the method of execution.
2) If the employer entrusted the Architect with supervision of all of part of the execution, he
shall also be responsible for defects pertaining to the method of such execution.

Art. 694

1) The contractor shall be responsible only for such defects as may occur in the execution other
than the defects which arise out of error in the drawing up of the design unless these defects
are visible.
2) Nevertheless, the Contractor shall be responsible for defects which are attributed to the
design if the Architect who drew up the design is engaged by him.

Art. 695

If the event of the Architect and the Contractor both being held responsible for any defect which
occurs to the work, they shall be jointly and separately responsible for such defect.

Art. 696

The case of warranty against the Architect of the Contractor shall stop with the lapse of three
years as from the date on which the collapse occured or the defect was discovered.

Art. 697

Any condition relieving the Architect or the Contractor from the warranty or limiting it shall be
null and void.

28
5 SENEGAL
Art 449 to 451 of the Commercial and Civil Code.

29
III – COUNTRIES WITH LEGAL BUILDER’S LIABILITY AND
WITHOUT COMPULSORY DECENNIAL INSURANCE AND
WITHOUT INHERENT DEFECT INSURANCE MARKET

1 ARGENTINA
Art. 1646 – Law 1771

In the case of buildings or works on real estate intended for long-term duration, received by the
contracting party, the constructor is liable for total or partial destruction if same originates from
faulty construction, faultiness of the soil or bad quality of the materials used, whether or not
same were provided by the constructor or the work affected on land owned by the tenant.

For liability to be applicable, destruction must occur within ten years after delivery of the
contracted work and the prescription period for legal action will be one year after same took
place.

The liability imposed by this paragraph will be applicable to include indistinctly the work
superintendent and the designer, according to the circumstances, without prejudice to a possible
recourse against whom it may concern.

A contracted annulment of liability due to total or partial destruction is inadmissible.

30
2 CANADA - QUEBEC
Fifth book, chapter 8, Section II, paragraph 2 – Civil Code

A client who accepts without reservation retains his right to pursue his remedies against the
contractor in cases of non apparent defects or non apparent poor workmanship.

Unless they can be relieved from liability, the contractor, the architect and the engineer who, as
the case may be, directed or supervised the work, and the subcontractor with respect to work
performed by him, are solidarily liable for the loss of the work occurring within five years after
the work was completed, whether the loss results from faulty design, construction or production
of the work, or the unfavourable nature of the ground.

The architect or the engineer may be relieved from liability only by proving that the defects in
the work or in the part of it completed do not result from any erroneous or faulty expert opinion
or plan he may have submitted or from any failure to direct or supervise the work.
The contractor may be relieved from liability only by proving that the defects result from an
erroneous or faulty expert opinion or plan of the architect or engineer selected by the client. The
subcontractor may be relieved from liability only by proving that the defects result from decisions
made by the contactor or from the expert opinions or plans furnished by the architect or
engineer.
They may, in addition, be relieved from liability by proving that the defects result from decisions
imposed by the client in selecting the land or materials, or the subcontractors, experts, or
construction methods.

The contractors, the architect and the engineer, in respect of work they directed of supervised,
and, where applicable, the subcontractor, in respect of work he performed, are solidarily liable to
warrant the work for one year against poor workmanship existing at the time of acceptance or
discovered within one year after acceptance.

An architect or an engineer who does not direct or supervise work is liable only for the loss
occasioned by a defect or error in the plans or in the expert opinions furnished by him.

For the purposes of this chapter, the promoter who sells the work which he has built or caused
to be built, even after its completion, is deemed to be a contractor.

31
3 NETHERLANDS

Art. 1645 Civil Code

If any building, build under contract for a certain price, complete by any defect in the structure
or event due to unfitness of the underground, the architect and contractors are therefore
responsible for ten years.

32
4 IRAQ
Art. 870 law n° 40 dated 1951 modified by law n° 48 dated 1973

1) architects and contractors shall guarantee, during a ten years period, partial or total collapse
of buildings or constructions they established even if such collapse is due to defect in the
soil, even if the principal licensed such defective constructions, unless the contracting parties
had intended such constructions to survive for a period less than ten years. The ten years
period starts from the time of completion and delivery of works. Every condition which meant
to exempt from or limit such damage is considered void.
2) The above terms apply to all contracts which have been in force before they came into force,
but not to the contracts the guarantee period of which had terminated before those terms
came into force.
3) The guarantee stipulated in article (1) above applies also to the inherent defects in the
building and the constructions which may weaken the building safety.
4) The right to bring legal proceedings for liability in accordance with the above article shall be
limited to one year from the date of collapse or discovery of defects.

33
5 JORDAN

Art. 788 to 790 Civil Code ;

If the construction contract stipulated that the Architect design and supervise construction while
the contractor undertook construction, they will be jointly liable for any damage that occurs to
any building or part thereof and for any threat to public safety caused by such building (s) or
part thereof for a period of ten years

The obligation to compensate will apply even if the threat/damage resulted from a fault in the
land itself.

The 10 years period shall start from the date of delivery of the works.

If the Architects work was restricted to design without supervision his responsibility would be
restricted to the flaws in the design and should the contractor be responsible only for a
construction his responsibility would be restricted for that part of the contract only.

Any condition or stipulation to the effect of relieving the contractor or an architect of the above
responsibility is declared null and void.

34
6 PHILIPPINES
Art. 1723 Civil Code

The engineer or architect who drew up the plans and specifications for a building is liable for
damages if within fifteen years from the completion of the structure, the same should collapse
by reason or a defect in those plans and specifications, or due to the defects in the ground. The
contractor is likewise responsible for the damages if the edifice falls, within the same period, on
account of defects in the construction of the use of material or inferior quality furnished by him,
or due to any violation of the terms of the contract. If the engineer or architect supervises the
construction, he shall be egally liable with the contractor.
Acceptance of the building, after completion, does not imply waiver of any of the causes of
action by reason of any defect mentioned in the preceding paragraph.
The action must be brought within ten years following the collapse of the building.

35
IV - HOW TO UNDERWRITE INHERENT DEFECT INSURANCE
The new underwriters’ main responsibility is to understand the factors which influence the design
and construction process and eventually lead to a building which is free of latent defects or
otherwise. It soon becomes apparent that the key factors in running a profitable account are
good risk selection and adequate technical audits. Experience has shown that these were sound
principles and those insurers who adhered to them have paid out on few claims or, indeed, none
at all. Those underwriters who chose to write business indiscriminately or to diminish the role of
technical auditors have suffered some significant losses.

Many of the ills of that industry would be resolved if broader forms of latent defects cover were
to emerge at prices which were attractive to buyers. This belief, shared by others, gave rise to a
further responsibility i.e. the need to underwrite the latent defects account properly and
profitably. There is enough evidence to suggest, even taking into account the poor experience in
France, that this day arrived some time ago. So far the wider covers have not emerged and the
level of protection available remains virtually unchanged from ten years ago although
underwriting attitudes have become more flexible. Those who have purchased the policies have
no reason to be dissatisfied with the product provided any losses have been paid promptly.
There is evidence that some of those insured that have not had losses may owe something to
the scope of the technical audits.

The provision of such covers is a difficult area for insurers. There has never really been any
consensus among underwriters as to whether these are best dealt with by long-term policies or
as an extension to annual engineering policies. It is also not easy to decide how far engineering
cover should extend. Should policies restrict cover to Damage and the avoidance of imminent
Damage caused by inherent defects?. Should insurers be willing to accept liability when plant
equipment and services do not conform to the agreed specification? Could they accept liability
for failure to meet specified performance standards? Do they accept liability for any shortcoming
in the original specification?

So far most of the engineering covers made available have limited protection to actual Damage
as defined caused by an inherent defect or such cover plus the cost of avoiding imminent
Damage. As annual Engineering policies already pay many claims where the cause is an
inherent defect it is not always clear to potential buyers what the real value of the extra cover is.

Will the insurance industry rise to the occasion? Will they find the right products and services at
a price that will enable them to encourage developers to part with an appropriate premium?

1- INHERENT DEFECTS INSURANCE POLICY

Inherent Defects Insurance Policy ( IDI ), is answering this need. It covers PHYSICAL DAMAGE
TO A BUILDING caused by faulty design, faulty workmanship and/or faulty materials in the
structural works (load-bearing elements essential to the strength and stability of the building, as
well as works forming part of external walls and roofing) that were not evident at the date of
inception (which may be defined as the completion of work), running for a period of ten years
after acceptance. The single premium is payable before this date and therefore, THIS POLICY
CANNOT BE CANCELLED even after a loss occurs by the insurer.

As mentioned above, a construction project, like any other creative activity, is always subject to
minor faults. This is why the IDI policy includes A DEDUCTIBLE to eliminate claims for such
defects, which are in no way unusual. By restricting cover to major structural damage, which has
36
the greatest impact on the insured but which is the least often encountered, the excess keeps
the insurance cost down to an acceptable level.

As IDI covers not only identical replacement of the defective structure but also reconstruction in
such a way that the building, once repaired, will be durable, it can only be taken out provided
the design and construction of the building have been checked by a technical consultant
approved by the insurer :Technical Inspection Service ( TIS ).

IDI is a first party policy, which means that normally only the principal (and/or the financiers of
the project) can be the insured. Nevertheless, contractors can also be protected by waiving the
right of subrogation against them.

When a claim is made, the insurer appoints an adjuster whose first task is to check whether the
conditions of the cover have been met. If so, REPAIR WORK CAN START WITHOUT WAITING
FOR ESTABLISHING THE BUILDERS' LIABILITY. The adjuster may then be asked to establish
liability so that he insurer can take legal action if he thinks it is opportune.

2- TECHNICAL INSPECTION SERVICE

As indicated previously, IDI covers not only identical replacement of the defective structure but
also reconstruction in such a way that the building, once repaired, will be durable.

Such defects result from errors which form part of the normal risk of construction companies or
which can be due to savings required by the Insured, and it is important tht they do not act as
though their insurance cover releases them from their responsibility. Therefore an independent
inspection is required by the Insurer. This is the role of the Technical Inspection Service (TIS).

The purpose of the Technical Inspection Service, whose appointment must be approved by the
Insurer, is to advise the insurer of the level of quality of the construction, i.e. that it has been
built according to proper and relevant standards, using appropriate materials and taking due
care.

The TIS is required to give impartial technical advice. Therefore it must be independent of the
owner, the construction companies, the architect and the design office. Accordingly, it must not
participate in the design and construction of the building, nor in the management and
supervision of the site. In addition, the TIS should not act as a loss adjuster, in case of damage,
on a building it has checked.

Based on the coverage offered by IDI, the activity of the TIS applies in the following areas :

•= The design (calculation hypotheses, specifications, drawings)

•= The materials (specifications, test certificates, implementation methodes)
•= The work on the site

As there is a presumption of honesty and skill (which needs to be checked by the TIS) of the
different parties, the TIS should not be obliged to be permanently on the site. Consequently its
engineers normally proceed with selective controls, are not involved in the site management and
therefore are able to pass impartial judgement on the works.

The TIS should rely on its own professional experience to pin –point the key elements to be
checked and the timing at which it will be necessary to carry out spot inspections to be sure that
the construction works are property performed.

37
At the beginning of the project, the TIS will carry out a preliminary review of the specifications of
the project, and all other pertinent documents which it needs to issue the Risk Appraisal Report.
This report has to describe the structure to be built, the materials and the type of foundation to
be used and the difficult or potentially trouble some points. It has also to include any technical
reservations that the TIS has regarding the inadequacy of the design of the suitability of the
building. The intent of the preliminary review is to allow the Insurer to determine whether the
premises can be considered for coverage under the IDI policy, as well as to help him rate the
risk.

The design review is the logical follow up to the premiinary review. The TIS will check for
compliance with all applicable codes, practices and professional standards (as well as drawings,
specifications, reports). Special attention needs to be given to the adequacy of the foundations
taking into account the soil conditions. This can be determined by reference to the soil report. If
any discrepancy is found that might change the nature of the risk, the TIS has to notify it to the
Insurer and has to contact the Insured in order to solve the problem in due time. If the
discrepancies cannot be resolved, the TIS has to notify the insurer and the Insured of any
possible reservations.

During the construction, the TIS has to monitor the implementation of the works, by spot
inspection, the number of which should be based on TIS experience. The TIS may attend site
meetings at its own covenience and should report project progress to the Insurer.

The TIS should make sure that the approved drawings are followed by the constructor and that
approved materials are correctly used. The TIS should review all on-site testing reports and
should check that the tests have been property performed by qualified people.

The TIS will recommend any additional tests it estimates to be necessary. In addition, the TIS
should indicate to the Insurer any modification that leads to a new evaluation of the risk.

At the end of the construction, the TIS after having checked the as-built drawings, issues a
Certificate of Approval including the reservations which have not been resolved. This certificate is
an integral part of the IDI policy. If there is no modification of the risk with respect to the Risk
Appraisal Report and no unresolved reservations, then the Insurer can confirm its commitment
on the risk.

3- WHAT KIND OF CONSTRUCTION CAN BE INSURED ?

It seems illusive to wish to cover all types of construction with IDI. It is clear that the works
which are either temporary or the life period of which is short (less than 4 years) are not eligible
for such insurance. For these constructions, the cost of which is generally not high, the owners
can be protected through existing policies such as PI insurance (the probability that the chosen
contractor gets bankrupt during this limited period is small) or CAR maintenance endorsement.
With others constructions, the life duration is higher, cannot also be insured by IDI because
either they need an annual maintenance program to be maintained in such a condition they can
be used (marine works for example), or because their everlastingness is mainly due to the way
they are used and not only how they are built (silos for example).

In conclusion, to be eligible for IDI coverage, construction should, at least, meet the following
requirements :

38
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CONCLUSION
This paper has showed some aspects of this quite new line of business in the engineering
insurance field.

Inherent Defect Insurance for construction is mostly developed in France. This country has
developed a specific experience due to the strict regulations from the Spinetta Law.

Nevertheless, a lot of countries in the world have set precise liabilities for builders in order to
protect the principals.

Generally, this liability is a 10 years liability.

We have seen that only a few of these countries oblige builders to take an insurance policy.

Most of the others prefer to let them free with this liability.

That is really an opportunity for engineering insurance companies to enter this new market, on a
first party policy basis.

Of course, there are some risks to avoid and the french example proves that it is not easy. All
insurers have lost a lot of money in the last decade because they have underestimated the
claims that have occured.

Nevertheless, we have shown that there is a way to make this business profitable. First of all,
the cover has to be well defined. Then deductibles must apply. Finally, a Technical Inspection
Service must be put in place with agreed companies. The Technical Inspection Service will be
facilitated if there are satisfying local technical standards for construction design and materials.

These three minimum requirements can make this market profitable.

The potential of premiums for this line of business can be estimated at around 0,125 % of non
life insurance premiums country.

This development of this business needs the support of large reinsurers that have acquired some
experience from countries in which there is already a market.

Insurance industry can help the building sector to set up quality labels : a building insured will be
considered as a factor of quality. Insurers have to discuss this matter with their building and civil
works companies insureds.

Insurance industry can participate in the securitization of financed projects.

Insurance industry can value the construction for principals when the buildings has to be sold.

This paper gives a short description of what it is possible country by country.

Insurance companies and engineering underwriters have now possibilities to dig up this matter
and to build up profitable portfolios.

40
ADDENDUM

SAMPLE

INHERENT

DEFECT

INSURANCE

POLICY

41
INHERENT DEFECT INSURANCE POLICY

INFORMATION

This Policy has been prepared in accordance with your instructions. Please read it carefully to
ensure that it meets with your requirements.

This Policy consists of the following sections:-

1. PREAMBLE - confirming that the insurance is in force

2. DEFINITIONS - defining terms used in the Policy

3. INSURING AGREEMENT - giving details of the cover under the Policy

subject to any variation which may be made by
endorsement

4. POLICY EXCLUSIONS - detailing exclusions which apply to the Policy

5. POLICY CONDITIONS / - describing duties, obligations and procedures of the

PROVISIONS insurance

6. SCHEDULE - describing who and what is insured

7. ENDORSEMENTS - detailing alterations to the basic cover if any, agreed

by the Insurers

8. CERTIFICATE(S) OF - as issued by the appointed Technical Inspection

APPROVAL Service

SPECIAL NOTE

Subject to certain conditions this Policy is capable of being transferred to subsequent owners of
the Premises insured whose interest should be made known to the Insurers prior to such transfer
in order to ensure that any change of use or occupancy of the Premises does not invalidate this
Insurance.

1
SECTION 1
PREAMBLE

In consideration of the Insured having paid the premium to the Insurers, the Insurers agree to
provide insurance subject to the terms, conditions and exclusions of this Policy up to the
amounts detailed in the Schedule, as Total Sums Insured during the Period of Insurance.

This Policy and its Schedule, Endorsements and the Certificate of Approval shall be read together
as one contract and any word or expression to which a specific meaning or definition has been
given shall have such specific meaning wherever it may appear.

For and on behalf of Insurers:

Signed ....................................................

Policy Number ....................................................

Date ....................................................

2
SECTION 2
DEFINITIONS

For the purposes of this Policy, the following definitions shall apply:

1. Insured The party or parties named in the Schedule, their successors in title and
their assigns (subject to Insurers agreement in writing) together with such
other parties described in the Schedule, to the extent of their respective
rights and interests in the Premises stated in the Schedule.

2. Inherent Any defect in the Structural Works notified to the Insurers during the
Defect Period of Insurance which is attributable to a defect in design or
workmanship or materials which was undiscovered at the date of issue of
the Certificate of Practical completion.

3. The Premises The whole and each and every part of the Works at the address stated in t
the

Schedule and the subject of:

- the Certificate of Practical Completion; and

- the Certificate of Approval issued by the Technical Inspection

Service attached to and forming an integral part of this Policy:-

comprising:

(a) Structural Works

(i) All internal and external load-bearing structures essential to

the stability or strength of the Premises including but not
limited to foundations, columns, walls, floors, beams; and

(ii) All other works forming part of external walls and roofing of the
Premises but excluding moveable elements of external
windows,
doors, skylights and the Non-Structural Works, Equipment,
Fixtures and Fittings described below:-

(b) Non-Structural Works, Equipment, Fixtures and Fittings

All non-load bearing parts of the Premises other than those works
described in paragraph 3(a) (ii) above as Structural Works
including but not limited to electrical wiring and connections,
equipment and fixtures for the collection and distribution of gas,
water, heating and ventilation, partitions, internal windows,
plaster, tiling, floor coverings, doors, surface finishing, drains, all
fixtures and fittings and all permanent mechanical and electrical
apparatus including boilers and similar plant included in the
Building Contract irrespective of whether such non-load bearing
parts, equipment, fixtures and fittings are fixed to or incorporated
in any part of the Structural Works.

1
 (c) External Works

All external non-structural works owned by the Insured and the

subject of the Building Contract, including but not limited to
pavement, cross-overs, paved areas, pedestrian and vehicular,
landscaping and all external drains, sewers, pipes, cables, wires
and other service media.

4. Works The works completed under the Building Contract

5. Finishing Any operation carried out for the purposes of completing and finishing the
Operations Premises after the issue of the Certificate of Practical Completion as
provided for under the Building Contract.

6. Building The contract or contracts for the design and construction of the Premises.
Contract

7. Certificate of The Certificate(s) of Practical Completion or other certificate confirming

Practical substantial completion of the Premises to be issued by the Insured's
Completion Architect, Engineer, Contract Administrator or other supervising officer
under the Building Contract.

8. Date of The Date of Inception will be the date shown on the Certificate of Practical
Inception Completion issued by the Insured's Architect, Engineer, Contract
administrator or supervising officer as the effective date of Practical
Completion under the Building Contract.

In those cases where the Building Contract provides for more than one
Certificate of Practical Completion:

(a) inception shall take place in respect of Premises which consist of a

single building upon the issue of the Certificate of Practical
Completion for the Premises as a whole unless otherwise agreed in
writing by the Insurers; and

(b) inception shall take place in respect of Premises which consist of

more than one building upon the issue of the Certificate of Practical
Completion for each building unless otherwise agreed in writing by
the Insurers.

9. Technical The party or parties engaged by the Insurers at the expense of the
Inspection Insured, to provide such examinations of plans, specifications, bills of
Service quantities and other documentation in relation to the Works and such
inspectionsof the Works as the Technical Inspection Service and Insurers
shall require. The duties of the Technical Inspection Service are restricted
to advising the Insurers on the relative level of insurance risk that they can
expect under this Policy.

10. Certificate The certificate(s) issued by the Technical Inspection Service to the
of Approval Insurers at the same time as or following Practical Completion under the
Building Contract forming an integral part of this Policy.

1
SECTION 3
INSURING AGREEMENT

1. Operative The Insurers agree to indemnify the Insured against the cost of repairing,
Clause replacing and/or strengthening the Premises following and consequence
upon an Inherent Defect discovered and notified to Insurers during the
Period of Insurance and not excluded herein causing any of the following
events:-

(a) destruction of the Premises; or

(b) physical damage to the Premises; or

(c) the threat of imminent collapse to the Premises which requires

immediate remedial measures for the prevention of an actual
collapse within the Period of Insurance.

2. Additional In addition to and consequent upon the above indemnity the Insurers
Benefits will indemnify:-

(a) the cost of demolishing the Premises and/or the removal of debris
from the Premises reasonably incurred by the Insured in
connection with the events (a), (b) or (c) described above up to the
amount stated in the Schedule;

(b) the reasonable legal, professional or consultants' fees incurred by

the Insured solely in connection with the events (a), (b) or (c)
described above up to the amount stated in the Schedule. The
Insurers will not be liable to the Insured for fees incurred for the
purpose of preparing a claim under this Policy;

(c) the additional costs of repair or replacing and/or strengthening in

connection with the events (a), (b) or (c) described above which
arise out of alterations in design, use or application of improved
material, improved or altered methods of working or construction
incurred solely and specifically in compliance with or consequent
upon any building or other regulations under or in pursuance of
any Act of Parliament or with Bye-Laws of any Public or Local
Authority. This does not include the costs of complying with such
requirements if notice thereof has been served before the events
(a),(b), or (c) described above are discovered or such costs which
relate to undamaged or unaffected parts of the Premises.

2
3. Period of The period commencing on the Date of Inception and expiring on
Insurance midnight ten years thereafter unless otherwise agreed in writing by
Insurers, provided that:-

(a) the premiums due have been paid to Insurers;

(b) the Certificate of Practical completion has been issued in

accordance with General Condition 1;

(c) Insurers have received the Certificate of Approval.

4. Total Sum The sum shown in the Schedule representing the full rebuilding costs of
Insured the Premises at the Date of Inception adjusted in accordance with General
Condition 2 and General Provision 3.

5. Limit of The liability of the Insurers shall not exceed in respect of each item which
Indemnity appears in the Schedule the final Sum Insured shown in relation to that
item in the Schedule or in the aggregate the Total Sum Insured or where
applicable the Limit of Indemnity (whichever is the lower) shown in the
Schedule for the Period of Insurance unless cover has been either
increased or reinstated by endorsement and the appropriate additional
premium paid to Insurers but excluding inrespect of each and every claim
the amount specified in the Schedule as the Deductible.

3
SECTION 4
POLICY EXCLUSIONS

1. This Policy does not cover any destruction, damage or threat of imminent collapse
caused by, arising from or consequent upon:-

(a) any fault, defect, error or omission in the design, workmanship, or materials of the
Non-Structural Works, Equipment, Fixtures and Fittings or of the External Works;

(b) any structural alterations, repairs, modifications or additions to the Premises during the
Period of Insurance unless the Insurers have been informed, the Policy endorsed, and
any appropriate additional premium paid to the insurers;

(c) inadequate maintenance or abnormal use of the Premises or the imposition of any load
greater than that for which the structure of the Premises was designed or the use of
the Premises for any purpose other than that for which they were intended and as
stated in the Schedule;

(d) the wilful acts or wilful omissions of the Insured;

(e) fire, lightning, explosion, earthquake, storm, tempest, flood, frost, bursting or
overflowing of water tanks, pipes or other apparatus, water discharged or leaking from
an automatic sprinkler installation, pressure waves caused by aircraft or other aerial
devices travelling at sonic or supersonic speeds or the impact of aircraft or other aerial
devices or articles dropped or falling therefrom;

(f) ionising radiation's or contamination by radioactivity from any nuclear waste or from
the combustion of nuclear fuel or the radioactive toxic explosive or other hazardous
properties of any explosive nuclear assembly or nuclear component thereof;

(g) war, invasion, act of foreign enemy, hostilities (whether war be declared or not), civil
war, revolution, rebellion, insurrection or military or usurped power, riot, civil
commotion, confiscation or requisition by any government or public or local authority;

(h) faulty or deficient weatherproofing in the Premises;

(i) faulty or deficient weatherproofing in those parts of the Premises below ground level;

(j) the failure by the Insured or their contractors or agents to carry out and complete the
Finishing Operations;

(k) any matter notified to the Insurers by the Technical Inspection Service and referred to
as a reservation in the Certificate of Approval or recorded in the Certificate of Practical
Completion unless subsequently rectified and approved in writing by theInsurers;

(l) subsidence, heave or landslip unless due to an Inherent Defect;

(m) defects which are the responsibility of the insured's professional advisors or Contractors
whether within the terms of the Building Contract or otherwise identified and notified to
the Insured before issue of the Certificate of Practical Completion unless subsequently
rectified and approved in writing by the Insurers;

1
 (n) the failure or omission of the Insured to commence or substantially undertake the
repair, replacement or strengthening of the Premises for which indemnity is provided
under this Policy within a reasonable period of time or such other period of time as may
be agreed in writing by the Insurers.

2. Further, Insurers will not be liable for:-

(a) The amount shown in the Schedule as the Deductible being that part of the risk which
remains at the Insured's own expense and the said amount will be applied to each and
every claim after the application of all other terms and conditions of the Policy including
Average and not to the aggregate of claims arising during the Period of insurance;

(b) any change in colour, texture, opacity or discoloration or staining or superficial

deterioration or marring of finishings or surface appearance or ageing processes;

(c) any consequential or economic loss or damage of any kind or description whatsoever
including but not limited to loss, costs damages, expenses or penalties as a result of
delay;

(d) the amount of any tax, duty, charge, rate or levy arising out of capital appreciation.

2
SECTION 5
POLICY CONDITIONS/PROVISIONS

GENERAL CONDITIONS

1. Duties of the Insured The Insured will:

(a) Supply the Insurers with a copy of the Certificate of Practical Completion within
one month of the date of issue.

(b) At their own expense, or through tenants, take all reasonable precautions to
prevent destruction, physical damage or threat of collapse to the Premises and
shall comply with Building or other regulations under or framed in pursuance of
any Act of Parliament or with Bye-Laws of any Public or Local Authority which
relate to the Premises;

(c) Not enter into or permit third parties who are within their control to enter into any
agreement, lease or contract with any person or persons involved to any extent
whether directly or indirectly in the design, supply of materials for or construction
of the Premises which would limit, curtail, nullify or otherwise render void or
ineffective the Insurers rights or entitlements to the extent of the insurance
provided under this Policy;

(d) Not exercise or seek to exercise any legal rights or remedies whether directly or
indirectly against Insurers in respect of the acts or omissions of the Technical
Inspection Service.

2. Premium Payments

The premium due to Insurers hereon at the Date of Inception is that calculated on
the provisional Total Sum Insured as stated in the Schedule less the deposit
premiums paid to Insurers. Within 3 months of the Date of Inception (or such
later date as may be agreed in writing by the Insurers), the Insured must submit
to the Insurers, the final Total Sum Insured. Any additional premium due must be
paid to the Insurers within 30 days of notification to the Insured of the amount
due.

All additional premiums for modifications, alterations or extensions of the Policy

must be paid to the Insurers within 30 days of notification to the Insured of the
amount due.

3. Fraudulent Acts

If any claim is fraudulent or if any fraudulent means or devices are used by the
Insured or any person acting on behalf of the Insured and entitled to receive any
part of the proceeds of insurance under this Policy in order to obtain any
benefit under this Policy or if any damage is occasioned by the wilful act of or
with the connivance of the Insured, all benefit under this Policy will be forfeited.

4. Change in Risk

1
 If any material change shall occur varying any of the circumstances disclosed to or
known to the Insurers whether occurring before or after the date of this Policy
which, had it been known to Insurers, would have influenced their acceptance of
the risk or the remium at which they would have accepted it, the Insured shall
immediately give notice to Insurers of such change with full particulars thereof
and the Insurers shall have the right to vary the terms of the Policy.

5. Misdescriptlon, Error or Omission

This Policy will be voidable in the event of misrepresentation, misdescription,

error, omission or non-disclosure by the Insured with intention to defraud.

6. Difference in Deductible

No insurance may be contracted by the Insured to cover the amount or part of

the amount of the Deductible stated in the Schedule without the prior agreement
in writing of the Insurers.

2
CLAIMS CONDITIONS

1. Claims Procedure On discovery of destruction, damage or threat of collapse to the

Premises or any other circumstance which may give rise to a claim
under this Policy or the happening of any damage not insured
under this Policy but which may threaten the stability of the
Structural Works, the Insured will at their own expense:

(a) give written notice to the Insurers as soon as possible;

(b) take all reasonable precautions to prevent further or any

damage;

(c) within 60 days of such discovery submit in writing full details

of the claim then available to the Insurers;

(d) supply or to the extent this is not possible, assist in procuring

all reports, certificates, plans, specifications, quantities
information and assistance as may reasonably be required by
the Insurers.

2. Basis of Claim In respect of an Inherent Defect causing:-

Settlement

(a) destruction of or physical damage to the Premises, the basis

of settlement of the claim shall be the cost of repairing the
damage to the Premises or renewing, replacing and/or
strengthening those parts of the Premises thereby directly
affected to a condition substantially the same but not better
than or more extensive than their condition when new except
insofar as it is necessary to alter the condition of the
Structural Works to relieve the effects of the Inherent Defect
directly causing the said destruction or damage;

(b) the threat of imminent collapse the basis of settlement of the

claim shall be the costs necessarily incurred by way of
remedial measures to prevent an actual collapse of the
Premises within the Period of Insurance.

1
 The cost of any temporary and/or provisional repairs will be met by
the Insurers providing their consent has been granted in writing to
such repairs and that these repairs either constitute part of the
final repairs or reduce the risk of further damage to the Premises.

The cost of any other alteration, additions and/or improvements

shall not be recoverable under this Policy except as provided for in
Clause 2(c) of the Insuring Agreement.

3. Arbitration If any difference shall arise as to the amount to be paid under this
Policy (liability being otherwise admitted), such difference shall be
referred to an Arbitrator to be appointed by the parties in
accordance with the statutory provisions for the time being in
force. Where any difference is by this Condition to be referred to
Arbitration, the making of an award shall be a condition precedent
to any right of action against the Insurers.

4. Other Insurances The Insurers will not be liable for any claim under this Policy which
is insured by any other policy in the name of the Insured or on
behalf of the Insured except in respect of any excess beyond the
amount that would have been payable under such policy or policies
had this insurance not been effected.

5. Subrogation Any claimant under this Policy will at the request and at the
expense of the Insurers do and concur in doing and permit to be
done all such acts and things as may be necessary or reasonably
required by the Insurers for the purpose of enforcing any rights
and remedies or of obtaining relief or indemnity from other parties
to which the Insurers will be or would become entitled or
subrogated upon its paying for or making good any destruction or
physical damage or threat of imminent collapse under this Policy
whether such acts and things will be or become necessary or
required before or after indemnity is provided by the Insurers.

6. Reinstatement The total Sum Insured is reduced by the amount of each and every
claim in excess of the Deductible from the date of first notification
of each and every claim to the Insurers.

The Insured has the option, subject to the agreement in writing of

the Insurers, to reinstate the Total Sum Insured on payment of the
appropriate additional premium.

2
GENERAL PROVISIONS

1. Access to Premises The insured will allow their Insurers or their representatives access
to the Premises at all reasonable times.

2. Average The Total Sum Insured stated in the Schedule of this Policy is
hereby declared to be subject to Average.

If, at the date of discovery of an Inherent Defect, the full

rebuilding costs of the Premises at the anniversary of the Date of
Inception
immediately preceding the discovery, is greater than the Total Sum
Insured adjusted in accordance with General Provision 3 below, the
Insured will only be entitled to recover such proportion of
indemnifiable costs as the adjusted Total Sum Insured herein bears
to the full rebuilding costs.

In those cases where there is more than one Total Sum Insured
specified in the Schedule, each is hereby declared to be separately
subject to Average.

3. Mid-Term Alteration The Insured may, from time to time request an increase in the
Total Sum Insured stated in the Schedule by written application to
the Insurers. If the increase is accepted, cover will commence
upon payment to Insurers of such additional premium as they may
require.

Before agreeing to such increase the Insurers have the right to

request the Insured to arrange an examination of the Premises by
the Technical Inspection Service at the expense of the Insured.

4. Assignment The Insured shall not assign this Policy without the prior consent in
writing of the Insurers and at the same time as any permitted
assignment, the Insured shall assign to the assignee of the Policy
all its rights, title and interest in and to contracts in respect of the
supply of materials for, design and construction of the Premises.

5. Governing Law It is hereby agreed that this Policy shall be governed by and
and Jurisdiction construed in accordance with English Law and subject to Claims
Condition 3 above, the English Courts shall have exclusive
jurisdiction in any dispute arising hereunder.

1
SECTION 6
SCHEDULE

This Schedule forms part of and is incorporated in Policy Number :

Insurers :

Insured :

Premises Insured :

Type of Premises :

Period of Insurance :

Date of Proposal :

Sums Insured / Limit of Indemnity

Item 1. Structural Works : As per Proposal Form

Item 2. Non-Structural Works : As per Proposal Form

Item 3. External Works : As per Proposal Form

Item 4. Removal of Debris : As per Proposal Form

Item 5. Professional Fees : As per Proposal Form

TOTAL SUMS INSURED :

Limit of Indemnity :

Deductible :

Total Premium : ******

Endorsements Applicable Number Type

at Date of Inception
(see Endorsement Wording for details)

2
IMIA – WGP 14(01)E Page 3 12/2/01

SECTION 7
ENDORSEMENT

FULL INDEXATION - 04

Where the Insured has elected and paid to the Insurers the appropriate Premium:-

The Total Sum Insured and the Limit of Indemnity are to be increased annually from the
Date of Inception of the Policy by the percentage indexation factor shown below. The
proportional reduction for underinsurance defined in the General Provision of Average will
only apply to the extent that the full rebuilding costs of the Premises exceed the original
Total Sum Insured increased by the said percentage indexation factor over the period
expired since the Date of Inception of the Policy, to the anniversary of the Date of
Inception immediately preceding the date of discovery of an Inherent Defect.

The Deductible stated in the Schedule shall be increased in the same manner annually by
the percentage indexation factor shown below.

Such increased Deductible applicable to a claim will be that calculated at the anniversary
of the Date of Inception immediately preceding the date of discovery of the said nherent
Defect.

Indexation factor: ******

Subject otherwise to the Terms, Conditions and Exclusions of this Policy Number: ******