For building contractors, public liability insurance is often seen as the ultimate safety net. It’s intended to protect you from the cost of accidentally damaging other people's property. However, most liability policies contain exclusions that can leave contractors financially exposed in some circumstances.

Understanding these critical gaps allows the contractor to be hyper-aware of the risk and implement other risk mitigation practices, so that the lack of insurance coverage never becomes an issue.

1. The "Insured’s Product"

A common trap for builders relates to how insurers define "your product" or "property being worked on." Public liability insurance is designed to cover damage to third-party property, not damage to your own work.

If you build or renovate a house, most policies interpret the work you have done as your "product." If a nail is accidentally hammered into an electrical cable and the house burns down some time later, insurers may deny the claim because it is "your product" that has been damaged. They will say the house itself is the product, and standard wording excludes damage to the product itself, only covering external property (like a neighbor’s fence).

The policy will have an exclusion like:

We will not insure you for any claim under this policy in connection with property damage to your products.

Here is a common definition of "your products" from a liability insurance policy:

Your products
Any property, good, product, or other thing, including labels, instructions for use, advice and property which
has been manufactured, constructed, erected, installed, repaired, serviced, treated, sold, supplied or
distributed by you after it has ceased to be:
a) in your possession; or
b) under your control; or
c) owned by you (including any ownership by way of any retention of title agreement).

The short version of this might be: "Anything you have constructed and handed over to your client is not covered by your public liability insurance".

Think of it like you're a manufacturer of car tyres. Once they've rolled off the production line and are in store the tyre manufacturer's public liability policy isn't going to cover those tyres if they're damaged. They view that as a product warranty issue, the manufacturer is responsible for defects in their product. In the same way, once you have completed an extension to a house the insurer sees this as your product and it falls under your warranty obligations if you're liable for damage to it. Public liability insurance is not a product warranty in that sense.

However, if the tyres fell apart and caused the car to crash, the resultant damage to third party property would fall under the public liability policy. In the same way, if your product caused a leak which resulted in damage to pre-existing property the policy would cover repairing that, just not your product.

Defective Workmanship Cover

The exception is where damage is caused by defective work and the policy has a defective work extension. Different insurers cover this differently however. Some will only cover damage to the insured's product if the defective work has first caused damage to third party property (eg. the leak has affected pre-existing property outside of the builder's work). Others will cover damage to the insured's product itself, if it is due to defective work.

The Gap

The gap in cover is when there is accidental damage to "your products" that is not caused by defective work but you are being held liable for it.

2. Defective Workmanship by Subbies

Main contractors are ultimately held liable for everything that happens on-site, including the work of their subcontractors. Unfortunately, some policies have a gap when it comes to faulty workmanship cover in this situation.

Standard liability policies feature a strict defective workmanship exclusion. Some then add back limited coverage for damage caused by defective work automatically. Others offer it as an option for most (but not all) trades. Some insurers have an enhanced cover, where third party property damage isn't required to trigger cover for defective work.

Depending on the insurer the defective work that is covered must have been done by the insured, not subcontractors. One insurer's cover specifically notes:

The Company will indemnity the Insured for all sums that the Insured is legally liable to pay as Compensation for the costs in respect of physical injury or destruction of the Insured's Products, where that physical injury or destruction arises out of the Insured's Defective Workmanship.

The Gap

If the defective work was done by a subbie, for which the contractor is legally liable (which they are in most residential settings according to the implied warranties contained in The Building Act) there will be no cover.

3. Building Defects and External Water Penetration

Perhaps the most significant exclusion stems from New Zealand’s history with leaky buildings. Standard policies heavily exclude claims arising from mould, rot, gradual deterioration, or external water penetration.

If rain penetrates the external envelope of a building due to faulty cladding or flashing installation, standard liability insurance completely shuts the door. Even if a claim involves a mix of issues, the water penetration component is entirely barred, leaving the builder open to potentially ruinous weathertightness claims. Here is one example of the exclusion:

We will not indemnify the Insured for any claim in respect of or alleging:
Any actual or alleged liability whatsoever directly or indirectly caused by, contributed to by or arising from:
a) the failure or alleged failure of any building or structure to meet or conform to the requirements of the New Zealand Building Code contained in the First Schedule of the Building Regulations 1992 or any applicable New Zealand Standard (or amended or substituted Regulation or Standard) in relation to leaks, water penetration, weatherproofing, moisture, or any effective water exit or control system;
b) mould, fungi, mildew, rot, decay, gradual deterioration, micro-organisms, bacteria, protozoa or any similar or like forms, in any building or structure.

The short version of this might be: "We won't insure you for anything related to the failure of a building to conform to the Building Code in relation to water penetration".

Other insurers separate out the requirement to comply with the Building Code from the exclusion for external water penetration, so that it is excluded even if there is no breach of the Code.

The Gap

Damage arising from external water penetration through the building envelope.

In a Nutshell

Liability insurance is extremely complicated! Three of the most significant issues, where cover can also differ between insurers are: a) the exclusion of cover for "Your Products",; b) the limitation of defective work cover to exclude liability for defective work by subbies; and c) the exclusion of cover for external water penetration. For these issues contractors need to examine their training, systems, processes and the teams they work with to mitigate these risks outside of insurance coverage.