Inherent Defects Insurance: Coverage, Claim & Exclusions

Updated: 26-10-2022 13:12:14 PM

Most builders or real-estate developers have an insurance cover called Contractor’s All Risk. It covers various risks like material damage, third-party liabilities, natural disasters, etc. However, incidents of house damage due to fault in the design of the property, generally not noted at the time of the purchase, are also evident can be covered under Inherent Defects Insurance policy.

What is Inherent Defects Insurance?

Under the Real Estate Regulation and Development Act (RERA), 2016, builders are liable to pay for any structural flaws in their buildings if it is detected within five years. Inherent Defects Insurance is a type of insurance policy that provides comprehensive protection to builders towards any financial liability arising due to repairing, restoring or strengthening of the insured property. It is designed specifically for builders or real-estate developers to provide them coverage against issues related to poor workmanship.

What all Inherent Defects Insurance Covers?

This policy covers loss or damage of property, if the claim arises due to:

• Structural components
• Defected material
• Structural design faults due to poor workmanship
• Fittings, installations

Claim Process for Inherent Defects Insurance 

Every insurance company in India may have different claim process for settling claim under Inherent Defects Insurance Policy. Below are the general steps for claim process:

• In case of any claim, the insurance company should be informed about the loss or damage
• Policyholder can inform the company on the toll-free number, Email ID or by directly visiting the branch
• Policyholder must inform the extent of loss or damage to the customer care executives
• After receiving the request, the insurance company will validate the information given by the policyholder by asking for the policy number, the name of the policyholder, etc.
• A surveyor or representatives are generally appointed by the insurance company to evaluate the loss or damage to the insured property
• Policyholder should try to preserve the evidence that may have led to the loss or damage to the insured property and submit the same to the representatives at the time of inspection
• Once the investigation process is completed, the insurance company then decides on the compensation to be made based on the policy coverage, its terms and settles the claim

Documents Required for Claim Process

Mentioned below are the lists of documents required for claim process:

• Policy/Underwriting documents
• Survey Reports with photographs
• Duly completed claim form
• Log book/Asset Register/Capitalized item list
• Repair/Replacement invoices with receipt
• All applicable valid certificate
• Any other relevant documents required on type of loss
• KYC documents where settlement amount is over Rs.1 lakh

Exclusions under Inherent Defects Insurance

Not all situations are covered by the insurance policy. These are called exclusions. Some of the general exclusions under this policy are mentioned below:

• If the usage of the property is for any other purpose other than the intended one
• If the property owner is found negligent in the maintenance of the property
• Natural disasters like storms, earthquake, tsunami, drought, volcanic eruption etc.
• The usage of non-standard products or material if not recognized by international organizations unless approved by the insurance company for their usage is excluded from any claims
• War, terrorism, nuclear risks
• Pressure waves caused by an aircraft or other aerial devices traveling at subsonic or supersonic speed and lead to the loss or damage to the insured property are excluded from this policy

Companies Offering Inherent Defects Insurance in India

Currently, there are only two companies offering Inherent Defects Insurance in India and they are:

• HDFC ERGO
• SBI General

Important Aspects

• It is compulsory for builders to have Inherent Defects Insurance policy before handing over the property to the property owners
• It is applicable to the defects that get inherited in the property when it is built and remain undiscovered until it is been handed over to the owner

Advantages of Inherent Defects Insurance

• This type of insurance covers other risks which are not covered under the traditional Contractor’s All Risk Policy
• It is a comprehensive insurance policy which covers loss or damage due to material damage or workmanship error in the property
• It will not only help developers but also help housing societies if any damage is caused by inherent structural defects
• Covers technical consultation fees or any legal fee related to the loss of the insured property
• Provides alternate rental cost

FAQs

Q1. What is the period of cover under Inherent Defects Insurance?

Under this insurance, period of cover is 5 years from the date of issue of Taking Over Certificate on receipt of the Certificate of Approval from the technical controller.

Q2. Are natural perils covered under Inherent Defects Insurance?

No. Natural perils are not covered under this policy.

Q3. Can this policy be issued on first loss basis?

Currently no companies offer a policy on first loss basis. However, there is a possibility but it deprives the insured of coverage in the event of total collapse.

Q4. What is the duration of the policy?

Indian Law allows developer a period of 5 years as per the RERA Act, 2016.

Q5. Who pays the fee of the technical controller?

The insurance company collects fees from the insured and then pays it to the technical controller.

Q6. What are the extensions available under this policy?

Mentioned below are the extensions available under Inherent Defects Insurance policy:

• Water Ingress Insurance
• Alternate Rentals
• Tile Insurance
• Loss of rent for limited period

Q7. Is subsidence of building covered?

Yes, subsidence of building is covered until and unless caused by an external peril.