Contract works insurance laid bare

Contract works insurance provides cover for sudden and accidental loss or damage to the works specified in the contract. This includes:

• Fire
• Theft
• Vandalism
• Construction collapse
• Natural disaster – earthquake, flooding, landslip, tsunami, storm
• Other accidental damage to the contract works

There are some common issues with claims under contract works insurance that builders should be aware of:

1)    Faulty workmanship: Damage caused directly by defective workmanship is not covered by
the policy. A common problem at claim time is deciding whether damage was caused accidentally
or by faulty workmanship. If your claim is declined for this reason, you may be able to claim on your public liability policy, but only if it includes cover for faulty workmanship.

2)    Scratched windows: If this is deemed to be faulty workmanship, the cost of replacement may not be covered. The typical scenario is that “someone” scratches the glass when cleaning off splashes of paint. There is a New Zealand standard for cleaning glass (NZS 103.12.6.2) and some insurers are now declining claims if these standards weren’t followed when the damage occurred. You should make your sub-contractors aware of this.

Who pays the excess?

The excess for damage caused by natural hazards has increased substantially since the Christchurch earthquakes. All insurers calculate it differently and it could be a percentage of:

a)    The total contract value when complete.

b)    The value of the work completed at the time the damage occurred.

c)    The value of the actual damage.

Let’s say you’ve done $200,000 of work on a $500,000 contract when an earthquake hits, causing $20,000 of damage. Depending on what it says in your policy, the excess could be:

a)    $5,000 up to $50,000 (in earthquake-prone areas).

b)    $2,000 up to $20,000.

c)    $1,000 (the minimum excess).

Unless your contract says otherwise, you could be responsible for paying the whole excess. We recommend you specify who pays the excess in your contract.

When does the policy expire?

Regardless of the end date on your policy, and depending on your insurer’s specific terms, the cover will stop on the earlier of:

• Practical completion.
• When the owner starts using the building.
• If it’s a spec, when 95% of the budget is spent.
• The end date on the policy.

So you may not have cover if the owners move in, or even just start storing their stuff in completed parts of the building. If the project is delayed, you must remember to extend the policy. Most policies include cover for the maintenance period, either automatically or as an option. This covers damage you’re responsible for that happened during the contract period but is only discovered later, or damage that happens while you’re carrying out work during the maintenance period.

Who should arrange it?

If it’s a new build, most contracts will require the builder to arrange the policy. Make sure you include the value of any materials supplied by the owner/principal, and if required list the sub-contractors that need to be covered too. You should also check that the allowances, such as for demolition, removal of debris and cost inflation, reflect the requirements of your contract.

If it’s an alteration, renovation or in any way involves an existing structure, you should ensure that the owner arranges the contract works insurance. Most contracts will specify this and it’s for their protection as well as yours:

• It’s best arranged by the same insurer who already covers the existing structure. The current insurer must be notified that work is going on, usually in writing, as they may decline cover if there’s a claim and they weren’t told.
• If you arrange it and don’t include cover for the existing structure, or don’t arrange enough, you may be liable for any damage that occurs, say from water damage that affects other parts of the house.

What if I have an annual policy?

These can be very convenient and cost-effective, if you build new homes that are all in a similar price range. You don’t have to apply for cover for every job, or remember to extend it if a project is delayed.

However, annual policies are not recommended if you do mainly alterations and renovations, for the reasons explained above. Annual policies come with a maximum contract value. This means contracts below this amount are automatically covered. However, any jobs that exceed this amount will have no cover at all. For those, you’ll need to arrange a separate policy.

About Bulitin New Zealand

Bulitin New Zealand is a specialist in construction liability insurance, with policies tailored to meet the needs of builders & tradespeople.

For more information visit bulitin.co.nz/Insurance, email Ben Rickard at ben@bulitin.co.nz or call him on (07) 579 6259 or 027 5212014