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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

For Contractors

  • 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?

9. Summary

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 insurance@parryfield.com.

The New Zealand Government enacted the Construction Contracts Act 2002 to help sub-contractors get paid on time and without fuss for construction work and to enable fast resolution to disputes arising under construction contracts. Parry Field Lawyers provides assistance with making and defending claims under the Construct Contracts Act.

Does the Construction Contracts Act apply to me?

The Act applies to a wide range of construction work, namely:

  • Construction, installation, alteration, repair, restoration, maintenance, extension, demolition, removal, or dismantling of any building or other structure.
  • Installing roadways, pipelines, water mains, sewers, electricity, water, gas, or telephone reticulation.
  • Heating , lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, security, and communications systems.
  • Any cleaning work carried out as part of the construction work.
  • Preparation for construction work such as site clearance, earth-moving, excavation, laying foundations; scaffolding.
  • Site restoration and landscaping, painting and decorating.

Making a Payment Claim

The parties to a construction contract are free to agree between themselves on:

  1. The number of progress payments under the contract.
  2. The gap between those payments.
  3. The amount of each of those payments.
  4. The date when each of those payments becomes due.

Where the contract does not address these issues, a contractor who carries out construction work for another person is entitled to issue monthly ‘payment claims’ for work done during that month. A payment claim must either be disputed or paid by the customer within the time period agreed for a response in the contract, by default this is 20 working days.

A payment claim must:

  1. Be in writing.
  2. Contain sufficient details to identify the construction contract to which the progress payment relates
  3. Identify the construction work and the relevant period to which the progress payment relates.
  4. Indicate a claimed amount and the due date for payment.
  5. Indicate the manner in which the payee calculated the claimed amount.
  6. State that it is made under the Construction Contracts Act.

If a payment claim is to be given to a residential occupier of a property, it must include a notice in a form prescribed by the Act setting out what the residential customer must do in response to the payment claim.

Payment Schedules

If the customer wants to dispute the payment claim, they must object to the payment claim by giving the contractor a ‘payment schedule’ in writing identifying the payment claim to which it relates and indicating what amount the customer is prepared to pay (which can be nothing). The amount the customer is willing to pay is called the ‘scheduled amount’.

If the scheduled amount is less than the claimed amount, the payment schedule must indicate:

  1. How the customer calculated the scheduled amount.
  2. The customer’s reason or reasons for the difference between the scheduled amount and the claimed amount.
  3. In a case where the difference is because the customer is withholding payment on any basis, the customer’s reason or reasons for withholding payment.

If the customer does not give the contractor a payment schedule by the deadline agreed in the contract, the customer becomes liable to pay the full amount claimed in the payment claim and the contractor may recover it from the customer by court proceedings, which cannot easily be defended by the customer.

Adjudication

If the customer issues a payment schedule within the time limit disputing all or part of the claimed amount, the contractor can refer the matter as a dispute for adjudication under the Construction Contracts Act.

The Act provides an adjudication process that enables a contractor to quickly get a decision on how much is owed by the customer. After the adjudicator is appointed, the contractor has five days to provide information in support of their claim. The customer then has five working days to respond. The Adjudicator must then issue a decision within 30 working days.

An adjudicator’s decision can be enforced in the District or High Court in the same that a judgment of those courts can be enforced.  This means the adjudication process can be an effective way to obtain quick payment for work.

 

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. If we can assist in any way please do not hesitate to contact Paul Cowey at Parry Field Lawyers (348-8480), paulcowey@parryfield.com