In my role advising commercial and residential builders and construction professionals, I am frequently asked “what insurance do our clients need to have in place?” While my response varies, broadly speaking, property owners who are renovating existing structures will require Contract Works insurance. Although it is common for the builder to take out this cover on the owner’s behalf, it is not necessarily required by law, and this is not always communicated clearly to property owners.
A frequent source of confusion among many of our construction clients and their customers (property owners) is whether Contract Works insurance covers the existing structures (buildings) undergoing construction and/or renovation. Whether commercial or residential, many property insurance policies contain a Contract Works/Construction Exclusion, and failure to recognise the limitations of cover can result in significant uninsured losses. This article outlines potential gaps in cover between the Contract Works and Building Insurance policies, and how you can limit risk in the event damage occurs.
DOESN’T PROPERTY/BUILDING INSURANCE PROVIDE ADEQUATE COVERAGE?
In many cases no, not for existing buildings undergoing construction, alteration, or addition. These properties and structures are at a higher risk of damage from events such as fire, explosion, malicious damage, theft, and storm damage (especially when works involve the temporary removal of roofing). Consideration must be given to possible liabilities arising through personal injury, damage to neighbouring properties and/or public utilities, as well as potential pollution or contamination from materials like asbestos. As such, traditional property/building insurance products look to exclude/limit their exposure to the higher risks associated with construction works.
The specifics of Property/Building insurance cover vary between insurers as well as the type of policy (Commercial vs Residential/Retail). While some policies allow for coverage for existing structures, and/or third-party liability, others may exclude all or parts of cover, or exclude cover once works exceed a specified contract value (e.g., $50,000). The intention of these exclusions and limitations is to ensure risks associated with the construction process are insured by the builders’ Contract Works policy, not the Property/Building insurance. As such, commencing works at an insured location without prior notification to the insurer may result in property insurance being voided or substantially limited.
HOW DOES CONTRACT WORKS/CONSTRUCTION INSURANCE WORK?
Contract Works insurance is tailored to the specific risks of a construction project. Cover is commonly broken down into two sections: Material Damage and Third-Party Liability. Amongst other things, the cover is designed to insure both the works under construction and any third-party property damage or personal injury caused as a result of the construction process. While the third-party liability policy may cover damage by the builder to existing structures, damage to the existing structures from other events (e.g., storm, bushfire, etc.) is not normally covered under a Contract Works policy. A Contract Works policy does not automatically cover existing structures, it must be specifically requested. This is generally applied on a case-by-case basis, with the underwriter likely to require more information about the property and additional premium to cover the associated risk.
PLANNING A RENOVATION? NEXT STEPS
While it is common for a construction contract to detail responsibilities relating to the procurement of Contract Works and Third-Party Liability insurance, the responsibility to maintain cover over the existing structures is not always explicit.
When considering works to your home or property, always check with your insurer and/or broker to understand the limitations to cover during the construction period. If your property/building insurance policy does not cover the existing structures during construction, an agreement must be made with your builder prior to commencing works to cover the existing structures under the Contract Works insurance.
Similarly, builders and construction professionals need to be clear on the limitations of cover for existing structures under the Contract Works policy (these are not always automatically covered). When cover for existing structures is required, approval from the insurer/underwriter should be sought prior to commencing works.
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Head of Client Services (NSW) – Corporate Insurance & Risk Solutions
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