What does the right building and construction insurance cover?

Construction projects face a wide range of risks – from natural calamities such as bushfires, cyclones, earthquakes, and flooding to man-made hazards like arson, theft, and vandalism – and for this reason, getting the right insurance is crucial for everyone involved, whether they are a tradie, a contractor, or the lead builder.

Having the proper coverage can help safeguard not only the property in development but also the company handling the project. But with all the different building and construction insurance options available, picking the right one can be an overwhelming endeavour.

Coverage comes in many forms, depending on the type of work being carried out, so it is vital for everyone involved to sift through the choices and find the policy that best fits their needs.

How does construction insurance work?

Construction insurance, also known as construction works or contract works insurance, provides protection for all assets during the construction period and covers the business from any liability claims resulting from the building project.

Coverage comes in two main types, according to Arundel-headquartered specialist insurer BuildSafe. These are:

• Single-project policy: This provides coverage for one-off construction projects.
• Annual policy: This insures various developments that will take place within a 12-month policy period.

When it comes to annual plans, builders also have two options:

• Run-off policy: Also known as a projects or contracts commencing policy, this insures all projects that commence during the policy period. It covers the project from the commencement date until construction is finished, even if the completion date falls after the defects liability period, which is a set timeframe after a project has been completed when a contractor is allowed to return to the site to remedy defects.
• Turnover policy: Also referred to as transfer or cut-off policy, this provides coverage for all projects being worked on or planned to be worked on during the policy period. Cover provided during the defects liability period is also transferred to any projects completed during the 12-month policy period. However, if a project is not finished within the allocated timeframe, “no defects liability period will attach,” meaning all projects underway will not be insured.  

“All construction insurance policies are going to have a defects exclusion,” BuildSafe wrote in a guide on its website. “But it’s understanding what covers are written back in that’s important.”

Read more: Insurer warns of increasing complexity in construction

What does construction insurance cover?

A contract works insurance policy typically provides two types of coverage. These are:

1. Cover for assets and property

Construction insurance protects businesses against accidental damage, theft, or loss of their assets – including building materials, tools, and equipment – left on-site during the building period. It can help cover the cost of replacing these assets, as long as the damage was caused by an insured event.

According to Aon-subsidiary HIA Insurance, contract works insurance also covers expenses incurred to prevent or minimise damage, including transport and storage costs for removing materials from the construction site due to an impending event such as a storm. 

“If the storm still causes damage to your project resulting in a claim, not only would contract works insurance cover the cost of repairing or replacing the damage from the storm but you could also be reimbursed for the costs you paid to remove and secure your materials,” the insurer explained.

2. Cover for third-party liability claims

A construction works insurance policy also protects businesses against liability claims resulting from their construction activities.

“A comprehensive construction insurance policy will also extend to cover completed operations liability, which ensures you are protected for any legal liability claims that arise once you have handed over the work,” Moolooba-based brokerage and risk advisory firm Crucial Insurance noted.

Read more: Soaring repair costs: What's the impact on builders' insurance?

The company also advised construction firms to make sure their policies include the following form of legal liability:

• Public liability for claims of injury or damage to a third-party or their properties arising from the construction project and other business activities
• Products liability for personal injury and or property damage claims from a faulty product the company supplied, sold, or manufactured
• Vibration, weakening, or removal of support for personal injury and property claims caused by these factors
• Liability for property in care, custody, or control of the business
• The company becoming insolvent
• Extension of legal liability coverage to include contractors or sub-contractors where required

Other features that can be added to a standard construction insurance policy, depending on the contractual requirements of a building project include coverage for professional fees, debris removal, defects liability period, owner supplied materials, inland transit, off-site storage, and escalation and variations expenses.

What should Aussie builders consider when taking out construction insurance?

According to East Melbourne-based specialist brokerage Master Builders Insurance Brokers (MBIB), there are several factors that contractors and builders need to assess to ensure that the policies they choose are “right for you and deliver best value for money.”

“There is no such thing as a standard policy, so builders should take particular care when taking out construction works insurance, as there are significant variations in the extent and quality of policies issued by different insurance companies,” the firm advised.

Here are some of the key policy elements that builders must consider when choosing the right plan, according to MBIB:

• Occurrences of loss or damage: At a minimum, contract works policies should cover occurrences of theft, malicious damage, wind, storm, flood and other water damage, cyclone, tsunami, subsidence and landslip, fire, and earthquake. It is also important for builders to determine what coverage is provided for damage arising from defects, as defective works are often excluded from standard plans.
• The insured works: Construction insurance should cover all properties in the project, along with ancillary and temporary works, and other items to be incorporated into the project, including formwork, falsework, scaffolding, sheds, and on-site amenities.
• Basis of claims settlement: The amount paid should be the costs incurred at the time of repair or replacement, and not at the time the damage happened. The repair costs should also allow for the builder’s reasonable margin to be added to the cost of damages claimed.
• Plant, machinery, equipment, and tools: Provisions can be made to insure plant, machinery, equipment, and tools, with options available for both on-site and off-site losses. It should also be established whether the policy is for replacement value or depreciated value and what conditions apply to unattended items.
• Insured parties: This should at least include the builder, owner, contractors and subcontractors, financiers. Project managers, architects, engineers, and consultants can be added if required under the building contract.
• Works limitations: As most policies limit the type of works that are insured, builders should check if their project fits within the parameters of the policy, particularly in respect of scope and type of works, location, maximum project value, maximum construction, and defects liability periods or any other limitations that may apply.
• Cover period: This generally spans from commencement, through the construction phase until practical completion.
• Alterations: A contract works policy does not typically cover properties undergoing alteration. Builders should arrange additional coverage if necessary.

Read more: Builders' faulty work has massive impact on home building insurance premiums

How much construction insurance do builders need?

When determining how much cover a construction project needs, there are several factors that companies need to consider. These include the total value of the contracts, the number of staff working on the project, and how much assets such as materials, tools and equipment are worth.

Experts advise construction firms to talk to an experienced insurance agent or broker as these professionals can help thoroughly assess the key risks they face and walk them through the different coverage options they have.