CAN YOU EVER BE FULLY COVERED?
Builtin looks at what ‘fully covered’ really means and compares a ten-year builders guarantee to professional indemnity insurance
We often hear from builders who want to make sure they’re ‘covered for everything’.
Unfortunately, protecting yourself from every possible event is simply not possible. Like life, insurance is a balance between risk and cost.
However, there are some risks that builders can and should insure. One of those is the risk of making a mistake while carrying out your professional service as a builder/project manager.
If you’re taking out 10-year warranty cover that comes with a “defects waiver” this is a good start. It will generally protect you from having to repay the insurer’s costs to fix whatever the problem was, whether that’s with materials or workmanship you were responsible for supplying (including that of your subbies).
However, it does not mean that you’re ‘fully covered’, as there are a number of gaps you need to consider.
1. The period before the waiver kicks in
Problems are usually discovered in the first 12 months after the job is completed, before your waiver protection has started. So, the insurer still has the right to recover any claim costs from you.
2. Jobs without a ten-year warranty in place
Some projects are too small to require ten-year guarantee insurance, or could be a type of work where a guarantee isn’t available, such as commercial jobs.
3. Work not covered by the ten-year guarantee policy wording
In general terms, ten-year warranty cover is limited only to the building footprint. So, if your contract is broader than just this and the error affects something outside the footprint, not only is your client not covered, but you’re not protected either.
4. A third party’s errors
If the architect, engineer, surveyor or some other professional involved in the project (but not contracted to you) has made the error, but you’ve been joined to the legal case, it’s unlikely that you’ll have cover. You’ll have to fight this yourself, with expensive legal bills at the very least.
Where professional indemnity insurance fits in
This covers mistakes you’ve been held liable for that are alleged to cost a third party (eg, your client) money. This is a broad definition and gives you wide coverage for mistakes made by you, your team, or by consultants or subcontractors that you’re responsible for.
The trigger for cover is that the client must have experienced the loss and be holding you responsible for it. There is no cover if a claim is related to products that have failed to meet their manufacturer’s specifications.
You must have cover in place when the claim is made against you and it must have been in place continuously from before the original mistake is alleged to have been made. This is standard practice for professional indemnity insurance, which will be carried by all the professionals you work with, including architects, designers, surveyors and engineers.
Don’t assume your consultants’ cover will protect you
While most of (if not all) the professionals mentioned above will have professional indemnity insurance, most of them (if not all) will have terms and conditions that limit their liability to you if they make a mistake.
This could see you caught in the middle, for example if the site was originally pegged out wrong and the loss is $50k, but the surveyor has capped their liability at two times their fee.
Since making professional indemnity insurance available to builders almost ten years ago, we have helped clients with 20 claims, with an average claim cost of $68k. While professional indemnity claims are less frequent than public liability ones, they are typically much bigger.