If you’re a builder with an annual contract works policy (instead of taking out individual policies for each build) it’s important you understand which type of annual policy you have. Any misunderstanding of how your particular policy works could leave you exposed.
Before we get into that though, here some other things you should be aware of with an annual cover.
Does An Annual Policy Suit My Operation?
If you’re doing new builds that are all of a similar type and price range then an annual is perfect for you. It saves the hassle of arranging individual policies for each job, and of doing extensions as/when they inevitably run over time.
If you do more one-off type projects, such as one or two large builds each year along with a bunch of alterations an annual policy is more complicated to manage. This is because the insurance for alteration jobs should be arranged with the insurer of the existing home, and the turnover associated with that work should not be included in your annual contract works insurance premium calculation. Working this out every year can be tricky, so you might be better insuring each of the new builds as single projects and ensure that your clients arrange contract works for all the alteration jobs. That would be the most common, and recommended, approach. Requiring your clients to arrange the insurance for alterations is also beneficial because they have to speak to their insurer and inform them that work is going on. Doing construction work on a house materially changes the risk being insured, so the owner has a duty to disclose this as a condition of their insurance. Failing to do so could jeopardise cover if there was a claim. As an aside, if your clients are arranging the cover it is a good idea to see a copy of the insurance certificate before you start the job, to make sure that they have!
Limitations on Annual Policies
Annual policies have a cap on the size of each individual project that can be covered within it. If your cap is say $1m and you do a project worth $1.2m that project would not be covered by the annual policy, at all. It would need to be insured separately under a single project policy and its value excluded from the annual policy premium calculation.
They also have a cap on the length of the construction period for each project. This is usually 12 months but could be less, or potentially more, if that’s what you have specified. Let’s say you take on a project that takes 14 months, this would not be covered by an annual policy with a 12 month cap and would need its own single project cover.
So, you start to see why annual policy suit a particular type of operation and not others. And why construction insurance can be complicated!
Some builders like to have what is referred to as a “blanket cover”, just in case they are doing work that isn’t covered by a client or can’t be insured easily or cost effectively by single project policies. This is fine, as long as you’re clear about what is and isn’t covered and the limitations under the policy.
The Two Types Of Annual Policy
The two main types of annual contract works policy are “run off” or “transfer”.
Annual Transfer (also known as Turnover)
This insures all the projects that start during the policy period (but not any that have already commenced). Cover ends on the expiry date of the policy, even if there are still projects under construction at that time.
Annual Run Off (also known as Contracts Commencing)
This also insures all projects starting during the policy period (again, not any that are already underway). However, with this type of policy cover continues until the projects have finished, even if this is after the policy end date, as long as it still meets the policy terms such as being within the maximum .
If you don’t renew the policy then you might have to pay for any difference in premium for the projects that will continue past the policy end date (eg. if the contract value increases).
Why is this a problem?
When you take an annual policy of either type you need to remember that any projects already underway won’t be covered by the annual. Hopefully they are already covered by single project policies, so that’s not a biggie.
Secondly, if for example you were to switch insurers and move from one type of policy to another this could create a gap in cover if you’re not careful. For example, switching from a transfer to a run-off policy would mean any projects still underway at the end of the transfer policy period would not be insured under the new run off policy (since it only picks up projects starting in the new policy period and the transfer policy does not include any run off for the projects still under construction).
Just remember to be very clear about why you are taking an annual policy and what jobs are and aren’t covered by it. Also be aware of what happens when you change policies or insurers and make sure that any projects already underway when you start an annual policy aren’t going to be left uninsured.
Request a quote for annual cover with Builtin at: https://builtininsurance.co.nz/quote/annual-contract-works
The information presented in this article is general in nature and not intended to be financial advice for individual situations. You should speak to an expert about your specific circumstances and needs.