What is Latent Defects Insurance?

Latent Defects Insurance (LDI) protects property developers or owners against damage resulting from defects in design, materials, or construction that only become apparent after completion.

The insured can be any party with an insurable interest in the project, and policies can be assigned to the new owners if a development is sold. Tenants can also be included as insured parties. Unlike traditional policies, LDI offers a no-fault, first-party insurance solution, meaning claims can be made without proving negligence. One simply needs to demonstrate that damage has occurred as a consequence of the manifestation of a defect in the way that the building was designed or built. Policies are typically written for a period of ten or twelve years and provides protection for the total reinstatement value of the building. Although not yet mandatory across all states and territories, interest in LDI is growing to enhance consumer protection.

Government mandates heighten need for Latent Defects Insurance

In 2025, long-awaited and much needed insurance capacity from a second insurance provider finally launched in the Australian market, arriving at a pivotal moment after the NSW Government's announcement seeking to mandate Latent Defects Insurance (LDI) by 2028. With increasing pressure from the NSW Government ahead of the proposed compulsory regulations, early engagement with LDI is vital. Understanding the costs and implications of insurance premiums and carefully reviewing policy wordings will be essential for planning and budgeting future projects. This new product gives insurance buyers choice and is fully aligned with government requirements.

As featured in The Urban Developer

Discover how new Latent Defects Insurance capacity is making waves in the industry.

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Latent Defects Insurance FAQs

What is the latent defect period in Australia?

LDI can normally only be purchased if an insurer’s engineer carries out a technical audit throughout the construction phase. Once they have signed off on the project’s construction, cover can be arranged from the date of practical completion for a period of 10 to 12 years.

Who needs Latent Defects Insurance?

Developers: Developers buy LDI to protect themselves and future owners from hidden problems that may show up after the building is finished. It helps make sure the building is built to a high standard and protects the developer’s reputation.
Builders/Contractors: Builders or contractors buy LDI to give their clients confidence and avoid possible claims for defects that could appear after the construction is done.
Property Owners/Buyers: Property buyers or owners benefit from LDI because it covers them if any issues with the building show up later, usually within 10 years, that weren’t visible when they bought the property.
Investors: Real estate investors buy LDI to protect their investment in case there are hidden structural issues that could affect the property’s value or rental income.
Banks/Lenders: Banks or lenders may require LDI when financing new construction to protect the property’s value and ensure the building is up to standard.

Is Latent Defects Insurance mandatory?

The NSW Government plans to make Latent Defects Insurance (LDI) mandatory by 2028. While we can't speak on behalf of other states or jurisdictions, there is a broader industry trend toward making LDI compulsory nationwide.

What are some of the main benefits of a Latent Defects Insurance policy?

The policy is assignable to future owners and/or tenants of the building.
No requirement for the policyholder to establish fault, negligence or liability.
Time-consuming and expensive litigation does not need to happen before repairs can be started, this enables the structure to be returned with the minimum of disruption.
The technical audit process may detect issues prior to practical completion, meaning defects are corrected before the owner takes over responsibility for the building from the contractors.
Cover can be widened to include a waiver of subrogation against the contractors.

What are some examples of common claims?

Latent defects can lead to structural damage that only becomes apparent after a project’s completion, potentially causing significant costs for property owners without LDI cover. Common issues, like inadequate foundations causing subsidence, may result from poor design, workmanship, or materials.

LDI insurance covers such risks and having an insurer’s technical auditor involved during construction reduces the chances of defects. A thorough foundation inspection during construction helps identify and address any issues with materials, workmanship, or design early on.

Water ingress is another frequent cause of LDI claims, whether through cladding in commercial buildings or a leaky roof in residential properties. An insurance engineer ensures the waterproof membrane meets Building Control standards and is properly designed. LDI policies typically cover water damage from 12 months after practical completion until the policy expires.

Is it a cheaper alternative to the Strata Building Bond?

It’s important to consider the specific needs of the project and the potential risks involved.

Case study example:

A developer recently had a residential block reach practical completion. After a year and half, it came to light that there was severe cracking within the foundation slab and there was inadequate structural support. This put the building at risk of collapse.

Given the significant cost associated with remediating a defect of this nature, the 2% strata bond would not be enough to respond.

While costs can be passed back to the contractor, this depends on whether they have the financial capacity or the necessary insurance coverage to cover the expense. If they do not, the developer will be responsible for bearing the cost.

If an IDI/LDI policy had been arranged, this would have been one less headache the developer would have to worry about.

Why choose Lockton?

Access exclusive new products and long-awaited capacity. Built from the ground-up, we are just one of just two brokers in Australia with access to a new Latent Defects Insurance product. The policy wording is fit for purpose and in line with the latest governmental requirements. This is one of the most comprehensive Latent Defects Insurance policies available globally. As of May 2025, it features one of the highest sum insured limits for properties currently available on the market.
Engage with product specialists, not generalists. Work with some of the best and brightest minds in the industry. Our Australian team includes a specialist with six years of experience focused solely on placing Latent Defects Insurance in London. We have a unique blend of global expertise and deep local knowledge, enabling us to deliver bespoke solutions for your needs in Australia.

Decision-makers should review and update policies to align with insurer expectations and regulatory standards. Proactively building a strong claims history will strengthen your organisation's position if legal mandates are enforced.

Phil Clauzel, Lockton