Why Banks and Financial Institutions lending money for building must ensure developers and owners have Latent Defect Insurance before starting.
As the recent Structural Defects that caused the evacuation of the Opal Tower highlighted the problems in the building industry, residents were unable to live in their apartment for months.
When a Structural Defect occurs and there is no insurance to rectify the problem, the sales value of the apartments and the equity that the bank or financial institution are holding is severely reduced, to the extent that the mortgage value that the bank is holding is well under market value, which can cause mortgage stress for the owner, increased equity contribution required from the Owner and even the bank taking possession and selling the property.
However, if the bank or financial institution required the Developer/Owner to have Latent Defect Insurance before starting the project, then in the above scenario, the Structural Defect would be fixed by the insurer with no cost to the owner, or loss in value.
If a Mortgagee in possession event happened and the property was sold, the bank, under the policy, has the same rights and interests as the original owner and the future owner would also be protected for the balance of the 10-year policy period.