Construction insurance – covering your risks 09 Dec 2015
Are you in the business of constructing property? Maybe instead your own property needs to be repaired, renovated or rebuilt? Whatever the scenario, ensuring you have adequate insurance in place to cover the risks allocated under your construction contract is vital.
Construction is booming in Canterbury, both new builds and repairs. Construction contracts allocate risk between owners, contractors, sub-contractors (and earthquake insurers) during construction, and beyond. Do you understand what risks the parties in the construction process, including you, have taken on and is there adequate insurance in place to cover those risks?
This article looks at these issues and answers some of your key questions in respect of them.
1. What kind of risks do I need to be aware of?
For Homeowners/the owner
- Your existing home/building being damaged by your contractor;
- Your existing home/building being damaged by sub-contractors;
- New building work being damaged by your contractor or sub-contractor;
- New and old building work being damaged by you;
- New and old building work being damaged by an insurable event (accident, third party, natural disaster);
- Latent defects in the building work – design flaws, faulty workmanship;
- Damage to plant, machinery, your own materials and vehicles;
- Being indirectly liable for other people’s faults
- The Existing structure being damaged by the negligence of self or sub-contractors
- The Contract works being damaged by the negligence of self or sub-contractors
- Existing and contract works being damaged by accident, third parties and natural disasters
- Consequential loss resulting from damage – delay, cost of rescheduling, need to redo undamaged work to fix damage
- Continuing liability beyond project completion date for latent defects by self and sub-contractors
- Damage to or loss of plant, materials, machinery or vehicles owned by the principal, you and sub-contractors
- Damage to third parties or their property: trespass to land, nuisance, liability for fire, negligence, breach of statutory duty
- Health and Safety and other statutory obligations (e.g. Consumer Guarantees Act, Fair Trading Act, Building Act and Resource Management Act).
- Liability to your employees.
2. How do I know what risks I’m actually taking on?
If you have a building contract, this is the first place to start. Have you checked it to see what risks you are responsible for? Even where one of the New Zealand Standard contracts (i.e. NZS 3910) is used, the Standards can vary as to what risks are covered and by who.
If you are unsure of what your risks are, take professional advice on your build contract.
Where there is no building contract or the contract makes no provision for a risk, the basic rule is that the contractor bears the risk in respect of permanent and temporary structures until completion, subject to a couple of exceptions such as damage by the homeowner/principal.
3. Do I have to insure against my risks?
No, not unless your building contract requires you to. You therefore also need to check to see who, if anyone, is responsible for insurance? Again, the New Zealand Standard contracts can vary as to what insurance is to be taken out and by whom.
However, even if the contract does not require you to take out insurance (or there is no build contract), you need to consider whether you can afford to cover your risks without insurance? If the worst case happens – a fire, natural disaster, leaky building – what would it mean for you and for the building project? Likewise, if you are homeowner/principal, consider the same if your contractor does not have adequate insurance.
4. I’m the owner, won’t my home/property insurance policy simply cover me?
No, most home/general property insurance policies do not cover construction risks. If your property is being repaired/altered, make sure you contact your insurer to let them know and to find out what you need to do to ensure the relevant risks are covered off.
5. Is it enough just to take out a general “All risk” insurance policy?
Not necessarily. The key question is whether your specific insurance cover actually covers the risks you have taken on and to what extent?
Does it adequately reflect your contractual obligations, the value of works, plant, materials, equipment etc? Does it cover additional costs, e.g. demolition of damaged structures, removal of debris, site preparation, professional fees, cost inflation etc?
For contractors, you need to focus on the risks you are responsible for and which, if they occur, may make it difficult for you to complete the work (i.e. financially or otherwise).
For the principal/homeowner, you need to focus on ensuring your responsibilities under the build contract are covered, as well as those taken on by the builder which may impact on completion of your build (even if those are to be insured by the builder).
Included within these checks is being aware of what risks are excluded under the build contract. For example, a contractor may limit its liability as to what works it is responsible for, the amount (i.e. a cap on liability), and the time period they are liable for. This means those risks pass to the homeowner/principal. Have you checked that any excluded risks are also covered by your insurance?
Again, if you are unsure, take professional advice. There is no point paying for an insurance policy which will not deliver when you need it to. It is better to know in advance what your policy will and will not cover in the event of a claim, than to find out later.
6. Are there any time limits on how long the policy covers me for?
Yes, Contract Works policies, for example, include a time limit as to when coverage stops. This is often the date of practical completion, use by the owner, Code Compliance or a set date.
Why is this important? Chiefly because there may be a period of time when certain risks are not insured, i.e. if there is a gap between the Contract Works policy ending and a new home insurance policy being taken out by the homeowner. Some insurance companies will not grant a new policy to the homeowner/principal until Code Compliance is obtained, which may be after the Contract works policy expires.
Has the policy also been extended to cover the maintenance period? Delays in completion may mean the policy expires before the work is finalised.
For Contractors who have professional indemnity insurance, have you checked how long your policy will remain in place? If it ends when the building works are complete and/or on the winding up of your business, you may not have cover for the possibility of future/ongoing claims in respect of the work.
7. What about the excess – who pays this in the event of a claim?
If it is you under the Contract, you need to check how much it is so you can factor this into your budget. If there is no contract or it is silent as to the excess, the general rule is that the party who takes out the insurance is responsible for the excess.
8. If a claim is made and my insurer pays out, what happens to the insurance proceeds?
Where your build contract obliges you to insure, there is an implied obligation to use any insurance pay out to fix the insured loss or damage. Some contracts also expressly state this. This again underlines the importance of ensuring any insurance cover is adequate otherwise your own funds may be needed to top up any shortfall to complete the work.
Who the funds are actually paid to depends on a number of things. For example, if the insurance policy is in the names of both the homeowner/principal and contractor, the proceeds can be paid to either party.
Correspondingly, if the principal/homeowner has a mortgage, the proceeds may be paid to the bank under the terms of the mortgage and the Property Law Act 2007. If that situation is relevant to you, have you checked with your bank whether they will re-advance the funds to enable completion of your building work?
Before you embark on a building project, make sure you know the risks you are taking on, your insurance obligations, and what your policy actually covers you for. Even if you are not obligated to take our insurance, consider – can I afford to complete this project without insurance if the worst case happens?
If are you are unsure of what your obligations are under your build contract or whether your insurance cover is adequate, take professional advice. Don’t leave it until a claim is made to find our whether your insurance cover adequately protects you or not.
If we can assist in any way with a building or insurance matter, please do not hesitate to contact us at email@example.com.