Q & A: Why are construction defects not covered by insurance policies?

Celtic Tiger-era building defects are affecting up to 100,000 properties across the State, with a potential bill of €2.8 billion to fix these issues.

Unfortunately for the owners of these buildings, there are few options when it comes to trying to find someone to foot the bill — even if an insurance policy is in place.

What are the housing defects?

Fire-safety issues have been found to be the most prevalent form of defect, present in 40-70 per cent of affected homes; with water ingress present in between 20-50 per cent, and structural safety defects the least common in about 5-25 per cent of homes, according to the working group established by Minister for Housing Darragh O’Brien to look at the issue.

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And just how common is it?

It is understood the working group has found that problems such as a lack of fire-safety material, structural defects and water ingress are present in up to 80 per cent of apartments and duplexes built between 1991 and 2013, which equates to 62,500-100,000 units.

But why doesn’t insurance just cover the cost of fixing defects?

This is where things get complicated. According to Lydia Bunni, a barrister specialising in the area of construction, most construction contracts have a claims made policy of insurance.

“It’s not the policy of insurance that was in place when these apartment blocks were being built, it’s the policy of insurance that’s in place today or whenever the claim is made that pays out. That’s the problem,” she said. If the contractor who built the apartment has gone under, then there is no insurance policy in place, she added.

But if the contractor is still in business, does the insurance have to pay out then?

More often than not, the answer is no, due to the way the policies were designed, and the ownership structure of apartment blocks.

Ms Bunni said: “Within the insurance policy itself, there will be very specific prerequisites that have to be complied with, prior to the insurance company agreeing to indemnify the insured. Sometimes the insurance company simply doesn’t cover the defect that has arisen.”

Another barrister specialising in construction, Dr Deirdre Ní Fhloinn, said when you buy an apartment you enter into a long leasehold, which is typically a 500-year lease.

“Each person has a leasehold, which means they don’t own the whole building. The structure and the common areas are usually owned by a management company,” she said.

“Usually the owners’ management company doesn’t really have an avenue to go after the original builder under the law of contracts if a defect subsequently appears in the building.”

As a result, homeowners typically took out their own individual policies. However, generally these products were intended for major structural defects, meaning the likes of water ingress and fire safety were not covered.

Have insurers paid out on any of these defects?

According to Ní Fhloinn, water ingress was covered in some instances, but fire-stopping problems was not generally covered by these warranty policies. Under the Homebond Scheme, water ingress and certain physical fire-safety risks are only covered for five years, but many of these issues only arising after this period has lapsed.

So is legal action not an option?

The cost of litigation is a prohibitive factor, according to Ní Fhloinn, who added that there is “complexity” in bringing a case forward if you are one owner out of 10 in a development.

“The structure that’s adopted for the ownership and management of apartment blocks doesn’t lend itself to litigating easily when it comes to a problem that affects the whole building,” she added. Furthermore, if an individual notices the defect outside the statutory six-year limit, Ms Bunni said any legal action is essentially a “lost cause”.

“Once the defect manifests itself in terms of taking a case, the time starts to run. Whereas maybe there needs to be a legislation change for a discoverability test. So time will only start to run from the time you discover the defect,” she said.

“Fire safety and firestopping as a defect manifests itself the moment the building is completed if not earlier. You’re never going to discover that defect until possibly it’s too late, as in most of these cases.”

So homeowners are liable for these costs?

Essentially, in many cases, yes. Ní Fhloinn said: “So if there is a defect in your building, and it’s not covered by a warranty policy, and the original contractor is either someone you can’t sue or a limited company that doesn’t have any money or any insurance, then what you’re left with is the apartment owners themselves having to collectively come up with the money.”

However, it looks like Government intervention will be on the way, with Tánaiste Leo Varadkar telling the Dáil on Thursday that there will have to be Government assistance for people who purchased apartments affected by construction defects.