Contract Works Insurance
Author: Lee Cleaver, sales development account broker at BHIB Councils Insurance
A new building or extension project sometimes takes months or even years to come to fruition. Designing, planning, funding, and arranging contractors to carry out the works are detailed and time-consuming tasks. By the time you are ready to start in earnest, what thought has been given to what could go wrong? Insurance is almost always one of the last things on people’s minds, and yet a carefully considered insurance programme surrounding the contract works can also take some time to compile.
Whilst insurance companies are happy to accept that minor running repairs and maintenance are standard day-to-day activities for those who are responsible for the upkeep of a property, they do expect to be advised about any major refurbishment, extension, or new addition as early as possible. Work carried out in proximity to an existing insured property/structure or a neighbouring third-party property significantly raises the risk of damage or loss. Failure to notify insurers could severely restrict the cover in the event of an incident. In many cases, additional insurance cover may be required to ensure your property remains protected.
We are often asked why we need to involve the insurer of the existing structure, where the contractors have confirmed that they already have their own Contractors All Risks and Public Liability insurance in place. In most cases, the contractors’ insurance policies only cover the new structure the contractor is building, as well as their materials, machinery, hired plant, tools and employees. It will not cover the existing structure. If your property insurer is aware that there is work going on, they will usually continue to cover the existing structure/building during the works period. If the contractor causes damage to the existing structure due to their own negligence during the works, then the property insurer would initially deal with the repair/rebuilding claim and then may be able to reclaim those costs from the contractors’ insurer. If the contractor causes damage to the new building/construction works in progress, then their policy should respond, and the cost of rebuilding/repairs would be picked up directly by their insurers.
In some cases, the Contract might require that the contracting party takes out the Contract Works insurance cover themselves, sometimes in joint names with the contractor. This will be clearly stipulated within the contract. If the insurance responsibilities are not clearly stipulated, please have that point re-checked by your legal advisers. In these circumstances, it is customary for the existing property insurer to provide the extra insurance, usually through a separate policy. Working with the same insurer ensures that the contract works policy corresponds with the building's policy, resulting in no gaps in coverage between the two policies. Contract Works policies can be extended to include tools, machinery and hired in plant, however, if the contractor already has those covered on their own policy, there is no need to duplicate the cover. The contractor should, in any case, always have their own Employers’ and Public Liability insurance policies. Ideally, their Public Liability Limit of Indemnity should be no less than the total rebuilding value of the property you have at risk, either attached to or near the contract works.
Additionally, the architects/designers should have their own Professional Indemnity insurance in the event a design error on their part results in an additional cost or financial loss.
When consulting your contract, there may be other insurance-related responsibilities, such as Joint Names, Surety Bonds (Performance Bonds, Advances Payment Bonds, Road & Sewer Bonds), and Professional Indemnity. If you are unsure as to how these may affect you, in the first instance, please query these with your legal advisers.
When choosing the values to be insured, you should always ensure that the sum insured corresponds with the maximum total value of the contract.
If you have a building project on the horizon, you must inform your broker/insurer as early as possible. Typically, the insurers will initially ask:
- For a full description of the proposed works, including materials to be used in the construction.
- For the dates involved.
- For a copy of the plans/designs.
- For details of the contractors involved and that you have checked their insurance cover. Your broker should be able to provide you with a suitable ‘Contractors Questionnaire’, which is usually completed and returned by the contractor’s brokers.
- For the total value of the works.
- Whether a separate insurance policy is required either by you, as the contracting party, or in the joint names of the contracting party and the contractor.
- Whether the site will be unoccupied for any period before, during or after the works.
- Whether the existing structure/building will be temporarily closed, remain in use, or be open to the public during the works.
- What additional security might be employed at the site during the works (fencing, alarms, security patrols, etc.)?
- If there will be any hazardous materials stored or accumulated on site (flammables, asbestos).
Additional questions are always likely, but this information should be enough for your insurers to determine initially whether or not they can continue to provide full cover for your existing structure and also whether or not a separate Contract Works policy will be required.
Subsequently, don’t forget to increase the cover on the property once the works are completed to ensure your property sum insured adequately reflects the additional rebuilding value.