Contract works insurance when you own the building

If you build for a living, are a subcontractor checking whether the head contractor's policy reaches you, or are an owner-builder in Queensland, construction insurance is written for you. This page is for the owner, while somebody else builds.

The most common way an owner ends up beside a burnt-out half-built extension with nothing to claim: the builder took out the policy, as the contract required, so the builder is the insured. The builder loses work done and not yet paid for. You lose the money already handed over, the rent you aren't collecting, and the finished building you expected, but only the builder is on the policy.

On the contract works wordings we place, the owner or principal can be added as an insured for their own interest in the works, so the policy responds to your loss as well as the builder's.

The two founders of this business use the cleanest version on their own building work: the entity that owns the building is the insured, and the builder is listed as an interested party.

A certificate is not the same as being named. A certificate of currency proves a policy exists, not that you are on it, so read the insured name on it, not the sum insured. What else a certificate does and doesn't prove is in commercial lease insurance requirements.

The name has to be the RIGHT name. Commercial buildings in Australia are usually held by a company, a family trust, or a self managed super fund, and the person signing the building contract is often a director or trustee acting for one. If the trust owns the building, a policy naming the director or trustee personally names somebody who doesn't own the risk. William Paull's own observation, and he sees it constantly: "wrong names on policies, especially building owners, is very common". If the entity on your title isn't the entity on your policy, fix it before the concrete goes down.

The first half insures the works: the structure going up and the materials for it, on site and, on most wordings, in transit or in storage. That half responds to physical damage (fire, storm, flood, impact, and theft) up to the sum insured.

The second half is liability during the works: claims arising out of the construction work, such as the crane that swings into next door's fence or the excavation that undermines the footpath.

Existing structures. In a fitout, a refurbishment, or a new floor on an old shell, the existing building isn't "the works". On the contract works wordings we place, the existing building can be brought inside the policy as an extension, so the policy responds to damage the new work causes to it. Two conditions come with it: the exposure has to be properly explained to the insurer, and the work must not have started yet. Without the extension, the existing building falls back to your own property policy.

The period of insurance. A single project policy runs for a defined build period, not a year, and an annual policy sets a maximum build period for each job it picks up. Tell your broker the moment a delay looks likely, because a project that runs past 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 handover, and a fault that traces back to the construction can still be claimed inside it. "Extended maintenance" and "guaranteed maintenance" are two genuinely different promises, and which one is on the schedule decides what that window covers.

The sub-limits, and the fact that nobody hands them to you. The insurer generally wants one number, the full project value, rather than a long schedule of values, and sets each sub-limit as a percentage of it by default. 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 works side, check these sub-limits before you accept a policy:

• Existing structures. The sub-limit that matters most wherever a building is already standing, and the one most likely to be set far below the old building's worth.
• Principal supplied materials. Anything you buy and supply to the job yourself.
• Variations and escalation. The buffer for a job that grows.
• Removal of debris. Clearing 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, a default limit rarely reflects these two:

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

• The finished building, once it is finished. From practical completion it needs an ordinary commercial building policy, sized to what it now costs to rebuild, not what it cost to build. Have commercial building insurance in place on the day the works policy stops.
• The tools, the machinery, and the plant used to do the work. Excavators, generators, scaffolding, and site sheds usually belong to the builder, not to you, and their place is under plant and equipment insurance.
• The builder failing. A builder who walks off, goes under, or doesn't finish isn't physical damage, so no contract works policy responds, and it becomes a matter for the building contract.
• Fixing faulty work itself. The policy generally won't pay to put defective design, materials, or workmanship right. Many wordings still pay for the damage the defect causes to the rest of the project, provided the rest of the build wasn't itself defective. Where that line falls is set out on the construction insurance page.
• Money you lose because the building is late. Delay costs, lost rent, and the tenant who walked are a different product: start with business interruption insurance, and on a commercial building the rent side is on commercial landlord insurance.

Standard Australian building contracts make you pick one of two arrangements when you sign, in the schedule at the back of the contract.

Our position. We usually see the builder arranging the cover, but we would usually recommend the opposite: the owner takes out the policy, and the cost of the builder's cover comes out of the construction contract, so it isn't paid for twice. That way you know the sum insured, the sub-limits, and that the period covers your job, and can have all three changed when the job changes.

The most common way we see an owner get caught. Where the builder held the only policy and goes under, the cover goes with them, and the owner needs an insurer for a half-finished site. In our experience that cover is harder to find and dearer, and a replacement builder won't 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 doesn't loses a builder and their cover on the same day.

That risk matters most at the moment because we are seeing builders go under, and holding the policy yourself from the start means you don't lose your cover with them.

Tell your insurer about the work. The commercial building wordings we place carry a condition requiring you to tell the insurer before alterations or building work begin. One phone call before the job starts removes one of the most common arguments an insurer can raise at claim time.

Watch the vacancy clock, because a refurbishment empties a building out. The commercial building wordings we place carry an unoccupancy condition, commonly 60-90 consecutive days, after which cover is restricted unless the insurer has agreed otherwise, and cover resumes automatically once the premises is occupied again. A narrow set of perils survives the exclusion, but past the limit an empty building is effectively uninsured. A fitout between tenants or a long refurbishment can pass the limit unnoticed, because nobody thinks of a building full of tradespeople as unoccupied. Landlords have a second, tighter clock: a glass benefit in vacant rentable areas can fall away after 60 days without the insurer's written agreement.

And a claim can outlive the works by years. In one leading Australian case, the building's owners, who had leased the premises out, paid personally years later for a handrail that was never fitted during their own renovation. The case is set out on property owners liability, the cover it argues for.

Who is claiming. Whether you are an insured was decided when the schedule was filled in, and cannot be fixed after the loss.

What was damaged, and which policy owns it. A fire doesn't stop at the line between new work and old structure. Where the existing building sits inside the works policy as an extension, one insurer handles the lot, but the extension cannot be added once the job is running. Without the extension, there are two policies, two excesses, two loss adjusters, and an argument about which side of the line each item of damage fell on.

Whether the sum insured on the works reaches the true value of the works. On a partial loss, most wordings test the sum insured against at least 80 per cent of the true value of the works and reduce the payment in proportion to any shortfall. On a total loss, the insurer pays the sum insured in full, and if that doesn't finish the job, the gap is yours. The arithmetic is on the co-insurance clause explained.

The figure that goes stale is the contract value: a contract varied three times upwards was insured 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 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 carries sub-limits sized for the old number. Every variation you sign is a reason to check the project value your insurer holds.

• Has construction begun? It comes first because what can be arranged, including whether the existing building can come inside the policy, changes the day work starts.
• What is the address of the site?
• What is actually happening on site?
• Tell us about the project. Not the paperwork. What is being built, why, and what it needs to be when it is finished.
• What is the project cost?
• How long is the construction period?