EDUCATION

Works Insurance: A Short Overview

Essentially, Contract Works Insurance (commonly called Works Insurance) provides the cover for construction projects. These include the coverage or construction projects, including the materials, plant, and equipment on the site and liability to third parties for property damage or personal injury.

Contract Works Insurance is essential for anyone involved in construction projects, from large-scale developers to independent contractors. 

Builders, plumbers, electricians, carpenters, and other construction professionals who work on construction projects need this insurance to protect themselves from any liability

Typical coverage

The insurance typically includes the coverage for damages to the construction site, including theft, fire, vandalism, or any other unexpected events that could occur during the construction phase.

This insurance is a common requirement in building contracts and many financial institutions funding projects stipulate that construction works insurance must be held as loan security. 

This is also considered to be a good business practice to simply hold this type of policy to protect your building works.

Builders who are getting this take particular care in taking out construction works insurance, as there are significant variations in the extent and quality of policies issued by different insurance companies.

More coverage 

Contract Works Insurance (Construction Works is another common name) provides added cover for a number of risks, some of which are outside of a builder’s control. As well as providing cover for losses to the build project caused by insured events, it can also include public and products liability cover.

This includes protection for build(s) throughout the construction period, legal fees, settlements and court costs incurred defending claims covered by the policy

In basic terms, this insurance mainly covers building works in progress, should loss or damage occur during construction. The insurance can be arranged specifically for each project or as an annual policy covering all projects undertaken with the insurance premium paid on works turnover.

For the contractor, it’s essential to have the right insurance coverage to protect you from any unexpected incidents or accidents. This one insurance is the contract works, which covers the loss or damage to the building or the project you’re working on.

The following information can help you to assess whether the insurance you arrange is right for you to deliver the best value for money. When arranging your policy, you need to ensure the following are covered.

Loss / damage

The scope of the policy should be comprehensive in the events that are insured. At most, it should include cases of theft, malicious damage, wind, storm, flood and other water damage, cyclone, tsunami, subsidence and landslip, fire including bush fire, and earthquake.

It is very important to determine what coverage is provided for damage arising from defects. Usually excluded are the costs of correcting any defective work. 

You also need to know how your policy will respond to damage caused by a defect (also known as resultant damage) to correctly executed works caused by defective materials, workmanship, design, plan or specification in other parts of the works.

Insured works/claims settlement

This should encompass all property comprising the construction, ancillary and temporary works, including all other items to be incorporated in the works, as well as other things like formwork, falsework, scaffolding, sheds and on-site amenities (including hired items).

The amount paid should be the costs incurred at the time of repair or replacement, and not at the time the damage happened – as the latter can generate a smaller payout. The repair costs should allow for the builder’s reasonable margin to be added to the cost of damages claimed.

Plant/machinery/equipment/tools

Provision can be made to insurethat the plant, machinery, equipment and tools (including hired items), with the added options available for both on-site and off-site losses. Ensure that coverage for any mobile plant is clarified. 

Establish whether your policy is for replacement value or depreciated value, if claims are reduced by under insurance, and what conditions apply to unattended items, such as locked premises or vehicle provisions.

Insured parties/works limitations

This should at least include the builder, owner, contractors and subcontractors, financiers and, when required under the building contract, project managers, architects, engineers and consultants.

Most policies will limit the type of works that are insured. Check that your 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.

Coverage period

This period generally spans from the start, through the construction phase until practical completion. It is advisable to include an additional time allowance after practical completion, as some contracts require extended cover or there may be a delayed handover.

If you hold an annual policy, check whether your policy covers only new projects commenced, projects underway at policy commencement or both. 

Should you undertake any speculative works, make sure that your policy coverage extends for a period after completion pending sale or in the event of strata title projects, ensure that the gap between practical completion and strata registration is insured.

Alterations/additions

A construction works policy covers only the new works being performed, not the property undergoing alteration. 

Always establish contractual responsibility to insure existing property, the status of the owner’s insurance over it during your works and arrange any additional insurance coverage necessary.

Owner-arranged insurance

Sometimes, these building contracts are arranged with insurance provided by the owner. In these circumstances, always satisfy yourself that the quality of the insurance arranged and the policy excess applicable is acceptable. 

There are various forms of ‘difference in conditions’ polices are available to fill gaps between your normal cover and the owner supplied policy.

Additional policy contingencies

There are many additional contingencies that may be insured under a construction works policy. They can be insured as a percentage of contract price (usually advisable) or for a set amount

Some of these extra contingencies may be compulsory under the building contract, or insured at your option.

Typically, the coverage includes loss or damage to the works under construction, liability coverage for third-party injuries or property damage during the construction phase, plant and equipment coverage, debris removal and professional fees coverage.

Builders typically have a contractual responsibility to insure their works during the construction period. Also, financiers of construction projects usually require proof of construction insurance before they will make progress payments.

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