KSA: Mandates insurance policy against defects inherent in projects


We previously reported that in 2018, the resolution of the Ministry of Municipality and Rural Affairs of the KSA laid out a plan for a new law that would require certain construction projects in the private sector to carry insurance against inherent defects.

Following Cabinet Resolution No. 509 issued on 09/21/1439AH, the Saudi Arabian Monetary Authority (“SAMA”) has now introduced the Standard Inherent Defect Insurance (“IDI”) Form . This law requires all contractors to obtain IDI against inherent flaws for qualifying projects. Stakeholders should note that wording cannot be changed without SAMA’s prior written approval.


IDI policy requires all contractors to obtain IDI for “eligible projects” from May 2, 2020. SAMA guidance confirms that non-government, residential and non-residential projects fall under the scope of eligible projects. This includes high-rise buildings (towers), warehouses, hospitals, hotels, assembly buildings (mosques, restaurants, sports facilities), school buildings, shopping malls, telecommunications towers, buildings and facilities. industrial, buildings less than 23 meters and high risk buildings as per decision of the Ministry of Municipal and Rural Affairs of Saudi Arabia.

An “entrepreneur” is defined in IDI policy as an “Natural or legal person authorized to undertake construction work, engaged under a construction contract and mandated by the competent authority to obtain insurance against inherent defects”. The construction contracts concerned are defined as contracts for “The design and construction of the premises”.


The IDI policy mainly covers the costs of demolition, repair, replacement and / or reinforcement of “Local” (being the insured property) “Following and consequent on” an inherent defect which is discovered and notified during the period of coverage and is not excluded. The inherent defect must have caused either (i) material damage to the insured premises; or (ii) the threat of imminent collapse of the premises, requiring immediate corrective action to prevent collapse.

Inherent faults

The “Local” envisaged by IDI policy is theoretically divided into various categories, being “Structural work”, “Envelope”, “Non-structural works”, “Equipment, fixtures and fittings” and “External works”.

An inherent defect is defined as “Any defect in structural work or in the envelope weakening the strength and stability or stability of the premises and attributable to a defect, error or omission in the design, materials, geological study or construction that does not ‘was not discovered on the date of issuance of the certificate of occupancy. “

Structural works within the scope of the policy include all internal and external load-bearing structures essential to the strength and stability of the premises, including, but not limited to, foundations, columns, walls , floors and beams. The Envelope includes all work that is part of the exterior walls and the roof but excludes (i) “Movable elements” windows, doors and skylights; (ii) exterior cladding not essential to the stability of the building; and (iii) equipment, fixtures and accessories.


Coverage is subject to a number of specified exclusions, including for losses resulting from alterations in geological conditions, the inability of the contractor to remedy known issues prior to the start of the policy, pure direct / indirect economic losses. and structural changes that have taken place during the insurance period (unless they have been notified to the insurers and an additional premium rider has been issued, if applicable).

Coverage period

IDI cover must be taken out for a period of ten years, after issuance of the Certificate of Occupation and receipt by the insurer of a Certificate of Approval.

The certificate of occupancy is issued by the competent authority and confirms the substantial completion of the premises.

The Approval Certificate is issued by a Technical Inspection Service (TIS), an independent third party body appointed by the insurer, at the expense of the contractor. The TIS will examine the plans, specifications, bills of quantities and any other documentation required by the insurer.

The policyholder is required to deliver a copy of the occupancy certificate once issued and to take all reasonable precautions to avoid physical damage or the threat of collapse of the premises.

Premium and deductibles

The IDI policy classifies premiums into a deposit premium and a final premium. The deposit premium is calculated on the total estimated sum insured and is prepaid at the start of the policy. The final premium is calculated after the completion of construction and the issuance of the certificate of approval. This is calculated based on the actual cost of construction. The policyholder is obliged to pay the balance of the final premium less the deposit premium before the certificate of occupancy is issued.

Any additional premium due to policy changes must be paid by the policyholder within 30 days of notification of these premiums.

Regarding franchises, the IDI policy distinguishes between residential and non-residential premises. For residential premises, a deductible of 5% of the amount of the claim applies, with a minimum deductible of 25,000 SAR and a maximum of 3,000,000 SAR. For non-residential premises, the deductible is 0.1% of the total sum insured. A minimum deductible of SAR 25,000 also applies to claims relating to non-residential premises, but unlike residential premises, there is no maximum deductible capped. Deductibles apply by inherent default and not on an aggregate basis over the term of the policy. However, if more than one claim arises from the same inherent defect, then the deductibles will be aggregated.

Complaints procedure

The policyholder must, within sixty (60) days of the date of discovery of any inherent defect that may give rise to a claim / occurrence of damage that could threaten the stability of the insured property, notify the insurer in writing and provide or assist in obtaining reports, certificates, plans, specifications and information on the quantities required to assess the claim. The policyholder cannot abandon the property, whether or not it has been taken possession of by the insurer. The IDI policy gives the insurer the right to revise or adjust the insurance premium based on any material change in the risk disclosed or known to the insurer.

Basis for Settlement of Claims

The IDI policy distinguishes between the basis of settlement of inherent defects that cause physical damage and those that pose a threat of collapse. In the case of an inherent defect causing material damage to the premises, the basis for settling the claim is the cost of repairing the damage or renewing, replacing and / or strengthening the parts of the premises necessary for the repair of the damage. property damage.

In the event of an imminent threat of collapse, the basis of claims settlement includes the costs incurred for any corrective action taken to prevent an actual collapse during the insurance period. The cost of any interim repairs is also covered provided the insurer has given written consent to such repairs and that such repairs form part of the final repairs or reduce the risk of further damage.

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