Ben Rickard, Construction Expert at Builtin Insurance Brokers, summarises the key questions that arose during ITM’s recent LBP Training Days.

What is the Building Defects Exclusion?

This is a clause added to all public liability policies (and others) after the leaky homes crisis. It basically excludes any claims related to the penetration of water into a building. Internal leaks, such as from a burst pipe, are typically still covered. Insurers generally still cover water that enters the building due to accidental damage, although this can be complicated. What’s not covered are failures in the building work itself that result in water getting in. If you are responsible for constructing or working on the building envelope you need to be aware of this exclusion and manage this risk via other means.

When should I have contract works insurance?

This covers accidental damage or loss to the construction work. Anytime building work is being done contract works insurance should be in place. In some instances, such as minor renovations, the existing house insurance policy may cover this without requiring contract works cover. Typically, if the work is structural and/or requires a consent contract works insurance is necessary.

If the work is to an existing structure the company that insures that building should also insure the contract works. If the work is a new building then the builder would typically arrange the cover (unless it is a labour only contract – in which case the principal should do it).

Always check the contract to see who is responsible. Make sure that if the owner is responsible you verify they have done so.

Do I need to have both public liability and contract works insurance?

Yes, as they insure different things. Contract works insurance covers the actual building work being done. Ie. the materials and labour that you’re supplying (including sub-contractors) as part of the contract. You can also insure any owner supplied materials under this policy too.

In most common scenarios public liability insurance won’t cover any of this while the contract is still ongoing. This is because it is all considered to still be the builder’s property (most contracts will stipulate that the builder owns the works until completed, paid for and handed over), so the loss is suffered by the builder, and if there is no loss to a third party then there is no claim under a liability policy.

Public liability insurance covers damage to property that is not yours. This includes property outside the works, such as other parts of the existing structure (eg. damage in the kitchen while you are doing a bathroom renovation), underground services, the neighbour’s driveway etc.

Are sub-contractors covered by contract works insurance?

They should be. Most policies will include sub-contractors as insured parties (you need to check if the policy schedule says this). If you are a sub-contractor and the main contractor has arranged the contract works insurance then you should still be covered if you cause damage to part of the works. Sometimes however, the main contractor will refuse to make a claim under the contract works insurance, putting pressure on the subbie to cover the damage themselves. Claims like that may be covered by the subbie’s public liability insurance, depending on what is damaged (ie. who owns or supplied the damaged items). However, increasingly public liability policies include conditions that will allow the insurer to decline these claims if there is a contract works policy in place that would have covered the damage.

The key point is that as a subbie, if the contract works insurance covers your work, you are entitled to make a claim under it if you cause damage.  Good practice would be to require as a condition of your contract that sub-contractors are named on the contract works policy. And to make sure you obtain a copy of the insurance certificate before you start work. That way, if a claim does need to be made you have the means to make it yourself.

Homeowners who arrange contract works insurance for renovations or alterations can also be reluctant to make claims if the builder is responsible for damage. However, that is what the policy is there for and the builder is equally entitled to claim under it. Explaining this early on in the process will help to avoid any drama if/when a claim becomes necessary. Obtaining a copy of the insurance certificate from them before starting the work also means you have information you need to make the claim yourself if that becomes necessary.

In a nutshell

Penetration of the building envelope by external water is an exclusion in public liability insurance. Contract works and public liability insurance cover different things, and you need to make sure both are in place. As subbies you are equally entitled to make a claim under contract works insurance arranged by the main contractor. The same applies for a builder when the homeowner has arranged the policy. Take appropriate steps to ensure that you can make a claim directly yourself if it becomes necessary.