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Insurance cover exclusions

29 Sep 2016, Featured, Insurance, Prove Your Know How

Deciding what insurance cover exclusions are relevant to include in the Prescribed Disclosure Information before building can be a convoluted task – Builtin offers some advice on how to proceed

According to the amendments to the Building Act introduced in 2015 – which further strengthened its consumer protection measures – builders must include all “relevant exclusions” when summarising their insurance cover in a disclosure statement.

Which ones are relevant and who decides this is not clearly defined. Can a builder be expected to decide this? Are they all relevant? Or is it only the one that results in a claim being declined that’s relevant?

What if you get it wrong? Your safest bet, and one taken by many builders, may be to include a full copy of your insurance policies with every disclosure statement, although that seems to defeat the purpose of introducing a disclosure statement to help consumers make better decisions.

MBIE’s disclosure statement template refers to three insurance policy examples: contract works; public liability and professional indemnity (also called errors and omissions indemnity).

It also talks about the guarantees and warranties that the builder offers.

Aside from product warranties and those guarantees given by subcontractors, many builders offer a ten-year guarantee of their obligations to the customer that is backed by an insurer or other third party.

This article highlights each of these policies, explaining what they cover and outlining some common exclusions and limitations, using Builtin’s policies as an example.

It should be noted that policies vary by insurer, and you should review your own or speak to your insurance adviser if you’re unsure.

Type of policy: Public liability
Protecting the builder from liability for the cost of accidental damage to, or loss of, another person’s property.

Amount of cover
Enter the limit of indemnity of your policy (eg, $1m, $2m, $5m or $10m). The policy will also contain a number of extensions with their own sub-limits too.

Relevant exclusions (examples):
Faulty design and materials, faulty workmanship (although this can be included as an extension), damage to the property you’re working on, your own products, damage caused by a vehicle and damage arising from your professional advice. Full details are contained within the policy wording, which is available upon request.

Type of policy: Contract works
Protecting the project from hazards such as theft, vandalism, accidental damage, storm, flood, fire and natural disaster.

Amount of cover
Enter the sum insured for the project. This should take into account the full rebuild cost, including any materials and subcontractors supplied by the owner. There are also a number of automatic extensions, such as for professional fees and cost inflation, with their own limits.

Relevant exclusions (examples):
Damage to existing structures (unless included separately), consequential loss, contractor’s tools and equipment (unless included as an option), full or partial occupation before practical completion, defective workmanship and design. Full details are contained within the policy wording, which is available upon request.

Type of policy: Professional indemnity (errors & omissions indemnity)
Protecting the builder from liability for causing a loss to the third party which is not related to physical property damage – eg, failing to correctly follow a specification, unauthorised product substitution, poor subcontractor work, incorrect site layout.

Amount of cover
Enter the limit of indemnity of your policy (eg, $250,000, $500,000 or $1m). The policy may contain a number of extensions that may have their own sub-limits too.

Relevant exclusions (examples):
Property damage and injury, financial estimates, building surveys and inspections, faulty materials, financial failure. Full details are contained within the policy wording, which is available upon request.

Nature or type of guarantee: Ten-year Homefirst Builders Guarantee
Giving peace of mind to owners that if their builder can’t complete the work the insurer will arrange for another builder to complete the build, absorb any extra costs and guarantee to fix future defects.

Period of cover
Completion cover ends on practical completion of the project. Defects cover lasts for ten years, expiring on the date shown on the guarantee certificate.

Limits on cover
Loss of deposit and non-completion – 20% of the contract price to a maximum of $500,000. Defects – $1,000,000.

Exclusions on cover (examples)
Contractual disputes, consequential loss to property that is not part of the works or is insured elsewhere, significant variations, landscaping, driveways and septic tanks, defects that are within acceptable tolerances, wear and tear and aesthetic variances. Full details are contained within the policy wording, which is available upon request.

One example that isn’t listed on MBIE’s disclosure template is the liability cover included with your motor vehicle insurance. This covers damage caused to your customer’s property by the vehicle, such as clipping a fence or reversing into a wall.

There are other policies builders are advised to have that are not relevant to your customers, so don’t need to be disclosed, but are important to managing your own risk. Examples include illness insurance, tools cover and protection from bad debt.

As mentioned at the start of this article, individual policy wordings from different insurers will vary. You should refer to the specific exclusions in your own policy wordings and discuss your situation with an insurance professional if you are unsure.

Builtin Insurance is a specialist in insurance and guarantees for builders and trade professionals. For more information visit www.builtin.co.nz or contact Ben Rickard at ben@builtin.co.nz or 0800 BUILTIN

Insurance cover exclusions

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