Contract works insurance when you own the building

Quick answerThe policy your builder holds is written for your builder. Whether it also pays you, and whether it reaches the building already standing on the site, depends on whose name is on it and what has been added to it before work starts.

If you build for a living, or you are a subcontractor working out whether the head contractor's policy reaches you, or you are an owner-builder in Queensland, construction insurance is written for you. This page stays on the one question that page does not ask: what does an OWNER need, when somebody else is doing the building.

A contract works policy is built from two halves.

The first half insures the works. The structure going up, and the materials bought for it: what is on the site now, and on most wordings what is in transit to the site or in storage waiting to come. It responds to physical damage - fire, storm, flood, impact and theft - up to the sum insured shown on the policy.

The second half is liability during the works. A building site creates risks for people and property that are nothing to do with the building itself: the crane that swings into next door's fence, the excavation that undermines the footpath. The liability section answers claims of that kind arising out of the construction work.

Existing structures. If the works are being done to a building that is already there - a fitout, a refurbishment, a new floor on an old shell - the existing building is not "the works". On the contract works wordings we place, the existing structure can be brought inside the policy as an extension, so that damage to the old building caused by the new work has somewhere to go. Two conditions come with it, and both are the reason this is a decision you make before the job rather than during it: the exposure has to be properly explained to the insurer, and the work must not have started yet. Where the extension is not taken, the existing building falls back to your own property policy.

The period of insurance. A single project contract works policy runs for a defined build period, not for a year, and an annual policy sets a maximum build period for each job it picks up. Weather, approvals and a supplier who does not deliver are the three ordinary reasons a job runs past it, and none of them extends the policy on their own. The moment a delay looks likely is the moment to tell the broker, because a project that runs out the far end of its own period of insurance is uninsured for the tail of the job.

The defects period after practical completion. A maintenance or defects liability period normally runs on past the day the job is handed over, and inside that window a fault that traces back to the construction itself can still be claimed. The wordings differ in a way that matters: "extended maintenance" and "guaranteed maintenance" are two genuinely different promises, and which one is on the schedule decides what is covered in that window.

The sub-limits, and the fact that nobody hands them to you. The insurer generally does not want a long schedule of values from you. It wants one number, the full project value, and it then sets the individual sub-limits as a percentage of that number. Those percentages are the insurer's defaults. If you want a sub-limit higher than the default, you generally have to ask for it, and nothing on the schedule tells you that you should have.

On the half that insures the works, these are the sub-limits worth looking at before you accept a policy:

• Existing structures. The big one on any job where a building is already standing, and it is the one most likely to be set far below what the old building is actually worth.
• Principal supplied materials. Anything you buy and supply to the job yourself rather than leaving to the builder.
• Variations and escalation. The buffer for a job that grows.
• Removal of debris. What it costs to clear a damaged site before anybody can start again.
• Professional fees. Re-drawing, re-certifying and re-approving after a loss.
• Expediting costs and mitigation costs. Getting the job moving again, and limiting the damage while it is happening.

On the liability side, two are worth naming, because a default limit rarely reflects them:

• Vibration, and the weakening or removal of support. The classic neighbouring-building claim, and the one that matters most where you are working alongside an occupied property.
• Property in your care, custody and control. Someone else's property that is in your hands while the work is done.

There are two normal shapes, and standard Australian building contracts make you pick one in the schedule at the back of the contract. It is one decision made at signing, and it decides who is protected by whose policy for the life of the job.

Our position, and it is a recommendation rather than a description. What we usually see is the builder arranging the cover. The arrangement we would usually recommend to an owner is the opposite: the owner takes out the policy, and the cost of the builder's cover comes out of the construction contract, so it is not paid for twice. What that buys you is knowledge and control: you know what the sum insured is, you know what the sub-limits are, you know the period covers your job, and you can have all three changed when the job changes.

What the policy decision does change is what happens next, and this is the most common way we see an owner get caught. Where the builder held the only policy and the builder goes under, the cover goes with them, and the owner is left looking for an insurer to take on a half-finished site. In our experience that cover is harder to find and dearer when it is found, and a replacement builder will not go near a part-built site unless somebody is insuring it. An owner who already holds the policy in their own name loses a builder. An owner who does not loses a builder and their cover on the same day.

In our experience there is no size of job at which this starts to matter. It matters most at the moment for a reason that has nothing to do with insurance: we are seeing builders go under. That is avoidable, and the place to avoid it is at the start, by being the one who holds the policy.

The version that goes wrong is nobody deciding: the contract says the builder will insure, nobody checks what the builder actually bought, and the answer arrives as a loss.

Three things decide it, and only one of them is the policy wording.

Who is claiming. The first question an insurer asks is whether the person in front of them is an insured under the policy. That is decided months earlier, when the schedule was filled in, and it cannot be fixed after the loss.

What was damaged, and which policy owns it. A fire does not stop at the line between the new work and the old structure. Where the existing building sits inside the works policy as an extension, one insurer handles the lot. Where it does not, there are two policies, two excesses and two loss adjusters, and the argument is about which side of the line each item of damage fell on. That argument is avoidable, and the place to avoid it is at the start: the exposure has to be explained to the insurer, and the extension cannot be added once the job is running.

Whether the sum insured on the works reaches the true value of the works. Contract works policies carry the same underinsurance mechanic as building policies. On a partial loss, most wordings test the sum insured against at least 80 per cent of the true value of the works, and where the figure falls short, the payment is reduced in proportion to the shortfall. On a total loss there is nothing to argue about: the insurer pays the sum insured in full, and the owner then discovers that the sum insured does not finish the job. The arithmetic behind both is on the co-insurance clause explained.

The figure that goes stale here is the contract value. A contract signed at one number and varied three times upwards during the job is a contract whose insurance was bought against the first number. On the contract works policies we place, the sub-limits generally run between 5 and 10 per cent of the project value, and each insurer is different. The variations and escalation buffer, the one sized for a job that grows, is the exception worth knowing about: on some of the wordings we place it defaults to 20 per cent, double the top of that range. Those percentages are set against the project value the insurer was given at the start, so a job that has grown past that number carries sub-limits sized for the old one, and a higher sub-limit has to be asked for rather than volunteered. Every variation you sign is a reason to check the number.