In the context of building contracts, a collateral warranty is an agreement entered into by someone engaged in the construction or design of a building. Within this agreement that person takes on a duty in seeing that the building is free from defects for the benefit of someone else who has an interest in it. When a collateral warranty is established, all the persons for whose benefit the contract was entered into have to show is that the loss suffered as a result of breach of warranty could reasonably be said to have been thought about or the possibility considered by the parties at the time the warranty was entered into. In practice, the terms of collateral warranties are usually dictated by the insurance industry which is naturally concerned with limiting its own potential liability.
Most warranties will contain a basic warranty by the one taking on the duty that they have exercised and will continue to exercise reasonable skill and care in the performance of their duties under their contract with the owner, and that their insurer will maintain professional indemnity up to a stated amount.
- Assignment of rights: The owner may consider attempting to satisfy the demand of their financial backer, buyer or tenant for protection against latent defects by transferring whatever rights the owner may have against members of the construction team.
- Latent defects insurance: In the UK, several of the leading insurance companies have introduced latent defects insurance in respect of commercial properties. Latent defect insurance commonly provides cover against damage caused by defective design or construction works for a period of ten years after completion of the development.
The policy can be taken out to cover the owner and their financial backers. Most policies will automatically insure subsequent owners and occupiers, which will obviously be the desired aim from the owner’s point of view.
