What is a Collateral Warranty?
A Collateral Warranty is used in building projects to create a legal, contractual link between parties who were not included in the original contract.
They have been developed because building developments involve many different stakeholders, from architects, main contractors, developers, sub-contractors to investors, buyers, landlords and tenants. Without a Collateral Warranty in place, each party involved in the project will only have a legal obligation to their direct client or supplier. This can lead to significant disputes if work isn’t completed or doesn’t meet the right standards.
For instance, if the original contract exists between the developer and the main contractor, a bank providing finance for the developer will not be able to make a legal claim against the main contractor if the building is defective. Similarly, a sub-contractor hired by the main contractor will not be able to make a claim against the developer.
With a Collateral Warranty in place, all parties involved in the project accept an additional duty of care to everyone else involved in the warranty.
What obligations are featured within a Collateral Warranty?
Collateral Warranties can be very bespoke agreements and they will be tailored specifically to your building project and the parties involved. However, a Collateral Warranty will probably feature the following clauses:
- Duty of Care: This will mean you are obligated to perform your work with reasonable care and skill and agree that you will fulfil the obligations set out in the original contract.
- Liability: Your Collateral Warranty may set out exactly under what conditions one of the parties in the warranty can make a claim. It will probably also include an upper limit on how much liability you will have (in other words, how much money you could be liable to pay).
- Time period: This clause will tell you how long the warranty will be in place. This is typically for a period of 12 years.
- Deleterious materials: You will probably spot the term ‘deleterious materials’ in your Collateral Warranty. This sets out the provision that you will not use materials that could harm the building or any people.
- Indemnity Insurance: Collateral Warranties require Professional Indemnity Insurance to be in place for the entirety of the time that the cover is in place. The warranty will therefore set out how long this period is (usually 12 years). Bear in mind that this could impact the cost of your insurance.
- Copyright: So that blueprints and other plans can be shared between the parties, you may be asked to give permission for these documents to be used by others.
- Assignment: Unlike some other forms of warranty, a Collateral Warranty cannot be reassigned without limit. This clause will therefore set out how many times it can be reassigned (such as to the buyer of the property).
What is the difference between a Collateral Warranty and a Structural Warranty?
There are some significant differences between Collateral Warranties and Structural Warranties when it comes to negligence, insolvency, Professional Indemnity Insurance and assignability.
As long as the claim meets the terms of the policy, a Structural Warranty will pay out regardless of who is at fault. Under a Collateral Warranty, negligence would need to be proven in court, which can be costly, difficult and time-consuming.
With a Structural Warranty in place, the insurer will meet any corrective costs no matter what the responsible party’s solvency is like or how able they are to correct the defect. However, if someone becomes insolvent under a Collateral Warranty, the end beneficiary will have to cover any rectification costs.
Professional Indemnity Insurance
It is important to note that under a collateral warranty, adequate limits of Professional Indemnity (PI) Insurance need to be maintained. Not only is PI Insurance invalid in the event of insolvency, but cover will also cease if PI is not renewed, leaving the property owner with no right of recourse in the event of a defect.
Professional Indemnity Insurance does not need to be in place for Structural Warranties. If the defect is covered by the policy, then the policy will respond. For a Collateral Warranty to work, Professional Indemnity Insurance is a must for the entirety of the warranty’s cover. It is worth noting that Professional Indemnity Insurance becomes invalid if the policyholder becomes insolvent. This could have significant repercussions if you have a Collateral Warranty in place as opposed to a Structural Warranty.
Structural Warranties can be assigned to others for an unlimited number of times. A Collateral Warranty, however, is more restricted which means that it will not necessarily be automatically transferred to the new owner.
Why should I choose a Structural Warranty?
Our Structural Warranties provide you with cover for the cost of correcting or repairing any structural damage that is caused by a fault in the design, construction or materials of a new-build, conversion or completed project. This cover will last for 12 years.
Having a Structural Warranty in place can make your finished project more attractive to sell. It will also meet the requirements of many mortgage providers, which could insist on one being in place before they provide a mortgage offer.
Finally, Structural Warranties can give future homeowners some valuable peace of mind that their home is protected against structural defects.
Unlike Collateral Warranties, you won’t have to take claims to court, insolvency will not invalidate your cover and there is no need to ensure that you maintain Professional Indemnity Insurance for the duration of the policy. For these reasons, it may be more suitable for you to take out a Structural Warranty instead.