Building societal resilience for the long-term

Asia is growing. This growth needs buildings, roads, homes, shopping malls, ports and tunnels. And everywhere across Asia, they are constructing at speed.

Government infrastructure spending across Asia has pushed construction to record highs while urbanisation has also fuelled the "faster" and "higher" building mantra. But what about " quality"?

Sometimes, that "quality" aspect would be easily scarified when under "Time" and "Cost" pressure. But whose responsibility is it when building defects show up five years later?

In one example, a group of Scottish homeowners fought for two years to get their homes repaired by the developer after tests found that the mortar used to hold the bricks together was inappropriate. A video on the BBC website in April this year allegedly shows mortar crumbling when a screwdriver was run gently the mortar following a rainstorm1.

While most of new building projects provide warranty cover for the first year, what happens after? How do we go about claiming defects beyond the warranty period? Does normal public have the financial capacity to seek recovery from developer? 

Inherent Defect Insurance

Inherent Defect Insurance, or IDI for short, provides coverage to owners or developers for up to 10 years following project completion. It covers design, calculation, specification, workmanship, material or geological investigation shortcomings which threaten the stability of the structural components or causes damage.

Firstly, it closes the protection gap that is not covered by traditional insurance. While Contractors' All Risks (CAR) can be extended to include rectification period, it usually only lasts one to two years. Property insurance designed for the operational phase only covers damage caused by external perils including natural catastrophes. But inherent defects are excluded.

And for indemnification under professional indemnity (PI), legal liability must be proven in a court of law, which can be a lengthy process. In India, there are allegedly 38,000 cases pending and only 4,500 judges to hear them. 2It could take years before your case file emerges. One other thing: even if legal liability is proven, the professional indemnity insurance usually carries a small indemnity limit which is insufficient for all victims.

As a result, if an inherent defect is discovered after a few years of completion - which is usually the case, there is little or insufficient coverage for restoration.

More resilient societies

But the benefits of IDI are much more than monetary. Strong economic development, population growth together with rapid urbanisation means an increased demand for resilient infrastructure, uninterrupted connectivity and reliable energy supply. As construction projects grow bigger, bolder and more complex, we are also becoming more vulnerable to risks. Hidden defects in infrastructure projects such as bridges, powerplants, financial centres knock out essential services, disrupt business continuity, and in some cases are deadly.

On May 23, 2004, a huge chunk of Terminal 2E at the Paris' Charles-de-Gaulle Airport came crashing down, killing four. The accident was said to be a result of a number of factors in a design that had little margin for safety. 3It took three years and EUR100 million to rebuild Terminal 2E, and two temporary departure lounges had to be constructed to fill in the capacity gap during the reconstruction period. Another more recent incident is the collapse of a mezzanine floor of the Indonesia Stock Exchange building in 2018. The collapse injured more than 70 people4 and hamstrung essential financial market access and services in the world's fourth most populous country.

IDI as a first-party policy, does not require proof of legal liability. Hence the evidence of damage is in itself sufficient to trigger the policy, reducing the lengthy legal process and ultimately optimising the claim settlement and repair time. And in a fast-changing world like today, the importance of getting back on your feet quickly can never be overemphasised.

As IDI requires an independent technical inspection to monitor the construction activities throughout the lifespan of the project, it helps to ensure the quality of the build itself.

Moving ahead with a sustainable Asia

IDI originated from France and is currently popular in parts of Europe. According to Swiss Re Institute's Sigma Report "Constructing the future: recent developments in engineering insurance", France generates over 90% of IDI premiums. 5With events such as the collapse of the Indonesian Stock Exchange continue to draw public attention, governments in Asia are turning to IDI in an effort to strengthen construction quality.

A compulsory IDI scheme was launched in Shanghai, China, in late 2016. The scheme was introduced to cover residential buildings and since then extended to municipal construction such as the Songpu Bridge Overhaul Project. The Shanghai model is also being discussed in other provinces and just recently the first IDI policy for residential property was issued in Beijing. Similarly, India has implemented the RERA Act 2016, where builders are liable for structural defects for up to five years.

"Global construction 2030" forecasts the volume of construction output will grow by 85% to $15.5 trillion worldwide by 2030, with three countries – China, US and India – leading the way and accounting for 57% of all global growth. 6In the race to build faster and higher, IDI will undeniably have a much bigger role to play in building a resilient and sustainable Asia.