What is developer’s ten-year liability insurance?

When undertaking a home construction project, a significant number of procedures must be completed, many of which are quite complex. From land purchase formalities, mortgage signing, or municipal permits, most of these operations are typically carried out only once in a lifetime, and a lack of experience can lead to complications. Therefore, it is crucial to understand each step to ensure a secure home construction process without incurring unnecessary financial or time losses.

At Slow Studio, we continuously strive, through our blog, to clarify key concepts to assist you in this complex process. For this reason, today we want to explain what developer’s ten-year liability insurance is, what it covers, and its conditions.

Broadly speaking, you should know that this insurance covers the construction of a dwelling once completed. It is not always mandatory but is often highly recommended. Let’s examine it in detail.

What is developer’s ten-year liability insurance?

The developer’s ten-year liability insurance aims to ensure the protection of users of buildings intended for residential use. Its purpose is to cover damages that may occur in the early years of a building’s life, ensuring that the cost of repairs does not fall upon the user.

This is an optional insurance often required by banks when contracting an architect or when one wishes to be fully covered, as the responsibility for construction typically lies with the architect and the builder, not the end-user. However, this responsibility is not always insured.

This means that in the event of damage to the property, whether due to the responsibility of the architect, the builder, or the end-user, these damages are ultimately covered by insurance.

For the bank, this is important because their mortgage guarantee is precisely the house itself, and they have a primary interest in ensuring it remains in perfect condition over the years.

When is Developer’s Ten-Year Liability Insurance Mandatory?

According to the law, contracting developer’s ten-year liability insurance is mandatory for all newly constructed buildings primarily intended for residential use – multi-family dwellings.

In the case of single-family home construction, it is not mandatory, although banks often require ten-year liability insurance when granting a mortgage to mitigate risks.

It is also mandatory to contract it when selling a property – still referring to single-family homes – within the first 10 years after construction completion. Both for multi-family dwellings and for sales within the first ten years, ten-year liability insurance is necessary to register the property for transfer.

The reason for this is to protect the new buyer from defects that the construction work might have, work that they did not oversee themselves.

What Does Developer’s Ten-Year Liability Insurance Cover?

Developer’s ten-year liability insurance functions as a basic construction guarantee to which additional coverages can be added.

The basic guarantee covers damages due to ground settlement, damages to floor slabs, beams, and the poor condition of pillars that may affect the building’s integrity. That is, it primarily covers structural issues which, in most cases, are the most costly to repair both economically and logistically.

Additional coverages offered by ten-year liability insurance can refer to the finishes installed in the dwelling, the proper functioning of installations, the waterproofing of the facade, and also the waterproofing of the roof.

Naturally, expanding the elements covered by the insurance will increase the premium payable. In each case, it is necessary to assess and weigh which elements are worth covering and which are not.

In this regard, it is advisable to discuss this with your architect, who can advise you on the responsibilities and guarantees required of the builder.

Who Must Contract the Insurance?

The insurance can be contracted by either the builder or the developer of the project.

If we are referring to a single-family home, the developer would be the user themselves, and contracting the insurance would ensure that any potential failures are covered without relying on the responsible agent to assume this responsibility.

On the other hand, as indicated in the title of this article, the builder themselves can also contract the ten-year liability insurance. This way, they would be exempt from having to pay if something went wrong, as the insurance would cover it.

The premiums for ten-year liability insurance are low, approximately equivalent to third-party car insurance. In fact, the value of the insured property can be 10-15 times greater than the total cost of the premiums.

Of course, the same agent who contracts the insurance, whether the developer (owner) or the construction company, will be the policyholder for the property’s ten-year liability insurance.

Minimum Coverage Periods for Ten-Year Liability Insurance

Just as there is a minimum guarantee when contracting this type of insurance, there are also minimum periods it covers for any type of construction or building.

It covers 10 years for damages caused by defects affecting the foundation, pillars, beams, floor slabs, etc., that compromise the integrity and stability of the building. That is, all structural elements that could pose a risk to the building and, consequently, to its occupants.

There is a three-year guarantee for defects in construction elements or installations that lead to non-compliance with the requirements established in the CTE (Technical Building Code).

Finally, there is also a one-year coverage guarantee for damages occurring in the finishes or completion elements of the work.

These minimum periods actually represent the responsibilities of the architect and the builder of the work, who must provide guarantees for the durability of the various elements.

Developer’s ten-year liability insurance is primarily used in cases where, for example, the builder cannot assume the repair of the damaged element.

In the post-crisis years, this insurance has been of great help to small private developers, as many construction companies went bankrupt, making it very difficult to assign responsibility for property damages to builders who had closed their businesses.

Why Contract Ten-Year Liability Insurance?

Although contracting ten-year liability insurance may not be mandatory, it can offer significant advantages for complete coverage and greater peace of mind.

The investment in building a home represents a substantial financial effort for most people, often involving a significant portion of their life savings. Ten-year liability insurance is frequently presented as an investment that ensures the property, now part of one’s assets, does not suffer damage, or that such damages are covered in any event.

While it is true that the incidents covered by developer’s ten-year liability insurance are infrequent, the cost of repairing these damages can easily exceed 50% of the total construction value, representing an enormous expense for an individual or some construction companies.

We should also consider that, once the architect’s and builder’s periods of responsibility conclude, a claim can involve a lengthy and costly legal process that will consume time and money. Ten-year liability insurance functions like car or home insurance, thus avoiding the extensive paperwork that claims entail. Furthermore, this type of insurance allows us to contract coverage beyond the mandatory ten years of builder responsibility.

We must not forget that the basic insurance covers the years of responsibility of the architect and the construction company. Therefore, if we wish for coverage beyond these periods, a broader guarantee than the basic insurance would need to be contracted.

As previously mentioned, the decision to contract developer’s ten-year liability insurance must be evaluated on a case-by-case basis. It is a secure option but comes with an associated cost that must be assumed.