Be sure to look under the cover of a new build warranty

As more and more new build properties spring up, purchasers and lenders take comfort when a developer provides a new build warranty from one of the many UK Finance Mortgage Lenders’ Handbook (UKFMLH) ‘approved’ new home warranty schemes. However, as the recent bankruptcy of Alpha Insurance A/S (AI) demonstrates, great care must be taken even if the warranty provider is on the UKFMLH’s ever expanding approved list.

Danish-based AI not only provided direct insurance products to UK customers, it also underwrote various new build warranties including many issued by CRL. With AI now insolvent, not only will homeowners with the benefit of a warranty not be able to claim against their warranty, but also the ability to sell the property within the first ten years of its construction is impacted. For developers, not only is any initial premium which it paid likely lost, it will now incur additional costs to obtain another new warranty in order to sell the new build property.

The key lesson to be learnt from the AI insolvency is that it is not sufficient to only ensure that any new home warranty provider is on the UKFMLH’s list. Rather, it is imperative that buyers and lenders check the details of the underlying insurer. Although it is of course not a guarantee, it is highly recommend that one should only consider policies underwritten by UK-based insurers which one of the major rating agencies has rated as at least “A” or better.

While some non-UK based insurance policies may be regulated by the Financial Services Compensation Scheme (FSCS), many are not. Further, any rights available to claim under the FSCS cannot be transferred to a buyer of the property and can take considerable time to finalise.

That being said, if you happen to have been insured by one of AI’s policies, further information can be found on the FSCS’s website.

Also, in respect of a new build warranty, the larger issue is that a claim might not crystallise for some years to come. So while an insurer may look adequate on day 1, it needs to have sufficient financial strength to remain in a similar position for the full ten year term of the policy/warranty. Great caution is therefore needed to look ‘under the bonnet’ at any underwriter of a new build warranty, especially when often the company selling such warranties (such as CRL) is not actually underwriting the risk and providing the insurance ‘cover’.

For further information regarding this topic or any other construction matter, please contact Brenna Baye – Associate, Stephen Brower – Head of Property or any member of Edwin Coe Construction team.

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