Contract works insurance

You need contract works insurance in place before a peg is put in the ground. Many things can go wrong in a project, from the excavation and foundation stage to the construction itself, and even building materials can be stolen. Other hazards include fire and malicious damage.

Contract Works Insurance is vital, but why is it necessary?

When it comes to the planning and organizing of a new construction project, insurance doesn’t always get the priority it requires. Very often it is left to the last minute or even after the work has commenced.

As having appropriate insurance cover in place is a requirement of all standard construction contracts, it is a matter that must be addressed prior to commencement of the project.

All standard forms of construction contract require a Contract Works Policy to be in place with minimum requirements that must be met. The contract conditions will stipulate who is to arrange the insurance i.e. the contractor or the principal, and who is to be named as ‘Insured’ under the Contract Works policy.

  • The bank will want an insurance certificate before it will release any funds. Arranging insurance after work has begun can delay your project while this is sorted out.
  • Your contractor may have insurance already in place but check that the cover he has is sufficient.
  • The project must be insured for the full replacement value including any materials or goods that you are supplying, for example kitchen appliances or any electronic equipment. These are most vulnerable when they have just been installed and the house is not secured.

Managing Risks in Building

All construction work no matter the size or complexity of the project contains an element of risk. This will vary from project to project but risks common to all construction works include:

  • Fire
  • Theft
  • Construction collapse
  • Natural Disaster – earthquake, flooding, storm
  • Defective design, workmanship or materials
  • Third party liability exposures

These exposures will result in additional costs to repair or replace the damage to the Works. In order to protect the project from these risks during the construction period a Contract Works and general liability policy will be required.

Are sub-contractors covered?

This depends on the requirements of the contract. Not all contracts will require the Main Contractor to name the sub-contractors as an Insured in their Contract Works policy. Some sub-contract agreements require the sub-contractor to take out their own Contract Works insurance and to name the Main Contractor and Principal as an Insured.

The Contract Works policy should follow the requirements of the contract so it is essential to understand the contracts requirements and that the contract and insurance policy mirror each other in this respect.
The Coverage

A Contract Works policy provides cover for sudden and accidental physical loss or damage that occurs to the property insured during the construction period. It is important to note that cover will cease:

  • On any part of the Works taken over or taken into use by the Principal
  • Once a Practical Completion Certificate is issued
  • On the expiry date shown in the Policy

The cover does continue through the defects liability period – called the Maintenance Period in the insurance policy – for loss or damage discovered during this period the cause of which arises out of the Contract Works or for physical loss or damage arising whilst executing work under the requirements of Defects Liability clause of the contract.

What is Insured?

The Contract Works should cover the full replacement value i.e. the cost of rebuilding the whole project. Principal supplied materials should be insured too. Very often the Principal will supply their own goods or materials e.g. the white wear provided in a house construction. These can be included in the insurance so long as their value has been declared in the sums insured.

There is then the ‘allowances’ which are required by contract – such as professional fees, removal of debris and increased costs. These are limited to either a percentage of the contract value such as 5% or a fixed amount.

A Contract Works policy also provides additional allowances:

  • Transit – provides cover for materials to be incorporated into the Works during transit to and from the contract site.
  • Materials in Storage – provides cover for materials to be incorporated into the Works when they are stored off site.
  • Expediting Expenses – allows for overtime, express delivery etc to speed up the repair time to get the project back on track.
  • Increased Costs During Reconstruction – allows for the inflationary costs of labour and materials.
  • Temporary Buildings – provides cover for site offices, huts, portaloos.

What is Not Covered?

It is important to be aware of what is not covered by the Policy. Not all eventualities are covered:

  • Construction plant, equipment and tools
  • Consequential loss, loss due to delay, penalties, liquidated damages
  • Losses discovered when an inventory is taken
  • Existing property – unless it has been specifically agreed to be included in the cover
  • Faulty design, workmanship or materials – consequential damage is covered
  • Existing Property
  • Your builder failing to complete work

Where a project includes working on an existing property either through renovation or an extension the contract conditions will normally stipulate that the Contract Works insurance is to be arranged by the Principal. It is generally considered that the Principal is best placed to take out the insurances necessary to adequately deal with the risks associated with projects involving existing property.

  • Contract Works insurance can be arranged on a project specific basis or on an annual basis.
  • Annual policies automatically cover all of the contracts which fall within the agreed parameters of types of contract insured, up to a specified value and save a considerable amount of time for those builders doing similar jobs throughout the year.
  • In addition to Contract Works insurance, the contractor needs to make sure that they have adequate Liability insurance.

General Liability

This policy provides cover the contactor for their legal liability for damage to the property of others or for personal injury arising out of their works, excluding personal injury where covered by ACC.

The General Liability policy does not, however, provide cover for damage to the works itself. The policy may provide cover for works that have been handed over but this would depend on the insurance arrangements made for the handed over property.

General Liability cover can be arranged on an annual basis or project specific for the full construction period plus any Defects Liability or Maintenance Period required in the contract.

The policy can be extended to provide indemnity to the principal for liability arising out of the contractors’ negligence. It can also be extended to cover sub-contractors if required.

Statutory Liability

A further policy that the contractor should have is a Statutory Liability policy. This policy can also be renewed annually or taken out for a specific contract. The policy provides protection to the contractor for legal action taken against them by a local authority or government department under an Act of Parliament.

From a contractor’s point of view, the most common Act that applies is the Health and Safety in Employment Act. The Statutory Liability policy provides indemnity for the costs involved in defending a prosecution by the Department of Labour where they have investigated an injury on site and believe that the contactor is in breach of their obligations under the Act.

As well as cover for the defence costs, reparations awarded against the contractor are also covered. However, under current Health and Safety legislation, it is illegal to insure the fine – the contractor must pay this themselves.
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Editorial supplied by QBE Insurance