Contract works insurance

Contract works insurance responds to physical damage to the works during construction. The usual insured events are fire, storm and water damage, flood where it has not been excluded, impact, theft, malicious damage and collapse.

Cover normally extends past the structure itself. Materials on site are included, and most policies can be extended to materials in transit or sitting in off site storage, which matters for long lead items such as facade panels, lifts and switchboards waiting in a yard.

Policies also carry additional benefits that do the quiet work after a loss. Removal of debris pays to clear the damaged works. Professional fees cover the architects, engineers and certifiers needed to redesign and recertify. Escalation allows for cost increases between the date of the loss and the rebuild.

The main policy period runs from possession of the site to practical completion. A maintenance or defects liability extension then keeps a reduced form of cover running while the contractor returns to site to rectify defects.

For a deeper look, read Construction Insurance in Australia: What a Builder Actually Carries, and Where the Gaps Hide.

Standard Australian head contracts make the contractor responsible for the care of the works from the time it takes possession of the site until practical completion, and require insurance of the works to match that responsibility. Check the insurance clause and the special conditions, because the amounts and the named parties are negotiated on most jobs.

The policy is normally placed in the joint names of the principal and the contractor, with subcontractors covered as well. That matters after a loss: any of the insured parties can claim, without first arguing about who owned the damaged work at the time.

On larger programmes the principal often arranges the cover itself under a principal arranged insurance programme. The contract then requires the contractor to comply with that policy and its conditions rather than place its own, and to carry the deductible where the contract says so.

Subcontractors do not usually take out their own cover for the works. They carry public liability, workers compensation and, where they hold design responsibility, professional indemnity, and they rely on the project policy for damage to the works themselves.

The exclusion that causes the most argument is defective design, workmanship and materials. A contract works policy is not a warranty on the build, so the cost of putting right the defective work itself is generally not covered.

Resulting damage is treated differently. Where defective work damages otherwise sound parts of the works, many policies will respond to that resulting damage even though the defective element is excluded. A membrane laid badly is a rectification cost for the contractor, while water damage to the finished ceilings below it may be claimable, depending entirely on the policy wording.

Other common exclusions and limits are wear and tear, gradual deterioration, consequential loss such as the principal's lost revenue, fines and penalties including liquidated damages, and cyber and terrorism events unless they have been specifically bought back.

Existing structures are the trap on refurbishment and fitout work. The building being altered is usually not part of the works and needs to be insured separately, so the contract should be explicit about who arranges that cover and for how much.

Insuring the original contract sum and never updating it. Approved variations and cost escalation lift the value of the works as the job runs. If the sum insured still reflects the figure at award, a major loss late in the programme is under insured, and the shortfall lands on whoever placed the policy. Tell the broker when the contract value moves, not at renewal.

Letting the period lapse before practical completion is certified. Cover is tied to dates and programmes slip. Extensions have to be arranged before expiry, not discovered afterwards.

Assuming existing structures are covered. On a refurbishment the base building usually is not, and finding that out after a fire is expensive.

Not reading the policy conditions. Wordings often carry requirements about hot work permits, fire protection, water testing and site security. Breaching a condition can cost the claim even though the event is insured.

Forgetting the defects liability extension. Damage caused while returning to site to fix defects sits in a different part of the policy, and it is routinely missed when the main period gets extended.