Who bears the risk of latent defects that are known to one party but not disclosed to the other party at the time of contracting?

• A. The party unaware of the defect
• B. The party with knowledge of the defect
• C. The government
• D. The contract’s insurer

Answer: (B)

Latent defects are hidden flaws that a reasonable buyer cannot discover through ordinary inspection. When one party knows about such a defect and does not disclose it, they carry the risk because there is a duty to be honest about known issues. Concealment or misrepresentation about a latent defect allows the other party to rescind the contract or seek damages, since they relied on the truth of what was disclosed. The party with knowledge bears the risk for failing to disclose. The government or an insurer isn’t the source of this risk in the ordinary contract framework unless there’s a separate regulatory or policy rule at play.