Are builders responsible for the insurance excess in the building contract?

by | Nov 23, 2017 | Insurance

A recent contract works claim for earthquake damage to a driveway was subject to an excess of $10,000. Depending on the contract terms the builder may have to pay it.

In this case, a new home was under construction and nearing completion when an earthquake struck, causing damage to the driveway that needed to be repaired.

The way excesses for damage from natural hazards are calculated varies across insurers. It could be a percentage of:

A. The total insured contract value, or
B. The value of the work done when the damage happened, or
C. The value of the damage

All will be subject to a minimum excess, and this and the % applied will depend on the earthquake risk in the region you’re building.

Because the home was nearing completion and the excess was calculated as a percentage of the work done at the time the damage occurred, the excess worked out as 2.5% of the approximately $400,000 spent up to that point. That’s an excess of $10,000, which was more than the cost to fix the damaged driveway.

The implications for builders

Firstly, if the value of the claim had been above the excess the builder & owner would need to have an agreement that states who’s responsible for paying it when the damage or loss is not the builder’s fault. Most reasonable people would say the builder should not have to fork out in these situations, but you should make sure your contract is explicit on this point.
Secondly, if the claim is below the excess the contract should state who is responsible for paying to reinstate the work if it is not covered by insurance. Again, is it fair for the builder to have to pay this (or to even pay a percentage of it) when the damage is caused by a natural event or for some other reason outside of the builder’s control?
In either case, having it clearly specified in your contract will avoid any arguments if/when it happens.

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