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 or the site could experience storm, earthquake, fire or malicious damage.
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Contract works insurance is vital, but why is it necessary?
When it comes to planning a new construction project, insurance doesn’t always get the priority it requires. Very often it is left to the last minute or even until after the work has started.
However, having appropriate insurance in place is a requirement of all standard construction contracts, so it’s something that must be sorted before the project starts.
- The bank will want an insurance certificate before it will release any funds. Trying to arrange insurance after work has begun can delay your project while this is sorted out.
- The project must be insured for the full replacement value including any materials or goods you are supplying, for example kitchen appliances or electronic equipment. These are most vulnerable when they have just been installed and the house is not occupied or secured.
Note, banks sometimes refer to contract works insurance as “builders risk“ insurance, but they’re talking about the same thing.
Managing risks in building
All construction work, no matter how small or simple, contains an element of risk. This will vary from project to project but risks common to all construction works include:
- Construction collapse
- Natural disaster – earthquake, flooding, storm
- Defective design, workmanship or materials
- Damage or loss by a third party
If something happens you may face additional costs to repair or replace the damage to the Works, or to compensate a third party. To protect the project from these risks during the construction period contract works and liability policies are required.
Who arranges the contract works insurance?
For new houses most standard building contracts will require the builder to arrange the contract works insurance.
Where a project includes work on an existing property, perhaps through renovation or an extension, the contract will normally state that the contract works insurance should be arranged by the homeowner/principal. This is because the homeowner is best placed to deal with the insurer of the existing property, and it is preferable to have one insurer covering both the existing structure and the construction work.
However, some domestic house insurers are reluctant to insure construction work, or may charge excessively, and in this case the homeowner can request cover from Builtin.
What does it cover?
A contract works policy covers sudden and accidental physical loss or damage that occurs to the property insured during the construction period.
Contract works insurance can be arranged on a project specific or annual basis. Annual policies automatically cover all of the contracts which fall within agreed parameters, up to a specified value. Projects that exceed this value will need to be insured separately.
The policy 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 ware. These can be included in the policy as long as their value is included in the sum insured.
There are also ‘allowances’ which are required by contract, such as professional fees, demolition and 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 such as:
- Transit – provides cover for materials to be incorporated into the works during transit to and from the site.
- Off site storage – provides cover for materials to be incorporated into the works when they are stored off site.
When does cover end?
Cover will automatically end on the earlier of:
- When any part of the works is occupied, taken over or taken into use by the owner
- On practical completion of the works
- On the expiry date shown in the policy
It’s preferable to err on the side of caution when choosing an end date, as construction workoften overruns. In that case arranging an extension to the policy can be more costly than if you were to simply overestimate the construction period when taking out the policy initially. Worse still, if you forget to extend the policy you’ll have no cover at all, at the very time the build value (and potentially the risk of loss) is at its greatest.
The cover does continue through the defects liability period, sometimes called the maintenance period, specified in the policy. This covers loss or damage discovered within this period that happened during construction, or for physical loss or damage arising while fixing defects.
What’s not covered by contract works insurance?
It’s important to be aware of what’s not covered by the policy. Although they vary by insurer, these are some of the common exclusions:
- Construction equipment and tools
- Consequential loss, loss due to delay, penalties, liquidated damages
- Existing property – unless it has been specifically agreed to be included in the cover
- Faulty design, workmanship or materials
- Your builder failing to complete the work (for this you need an independent building guarantee)
Get an estimate
You can also get an instant quote and apply for cover online.
10 year building guarantees
In addition to construction related losses, owners also face the risk of their builder going bust and being unable to finish (or in some cases even start) the build. To protect you from this, and to cover the cost if defects arise after completion, an independently insured 10 year guarantee is required. Read more about these here.
Editorial supplied by Builtin Insurance – Contact us here