Contract works insurance – what is it and why do you need it?
Property investors need to be able to trust their building contractors. When you invest in a property construction or expansion, for example, you need to know that the work will be completed to a reasonable standard and deliver a return within a reasonable timeframe.
What happens when a construction project is damaged, disrupted or destroyed by an adverse event, such as fire, flood, storms, vandalism or theft? It would certainly not be your liability, but are you confident your contractor would be able to cover the loss? Checking your contractor has contract works insurance should be a top priority for any clued-up property investor.
Why is contract works insurance necessary?
When you enter a contract with a contractor or other firm such as builders, plumbers or engineers, there is an agreed price that reflects the cost to the contractor such as materials, labour, equipment and plant hire, plus a percentage mark-up to provide their profit margin.
If an adverse event occurs, the contractor is still obliged to complete the contract for the same sum of money. However, many builders and other contractors would struggle to cope with the cost of effectively carrying out works twice if an adverse event occurred, particularly if this was an event such as storm or flood, which could affect multiple projects underway in a local area. The contractor could even become insolvent, leading to you losing deposits and interim payments made against the project.
Construction works insurance provides protection to cover the cost of materials, labour, tools and plant hire if something goes wrong during the course of a project. Without it, you might find that your contractor is theoretically obliged to complete a contract for you, but in practice is unable to do so or can only complete the work at a snail’s pace due to lack of available funds.
Types of risk which are covered by contract works insurance
As recent harsh winters have shown us, extreme weather events are on the rise in the UK. Flooding, storms and the associated structural problems and landslips are proving a real problem for property owners in many parts of the country. In winter 2015, around 16,000 residential properties were flooded in England alone, during the wettest December in a century.
In addition to this risk, familiar threats such as fire, vandalism and theft can halt developments in their tracks unexpectedly. Even seemingly minor incidents such as the theft of roofing metal from a property can cause damage and delays.
These types of risk are covered by contract works insurance. A policy will usually provide cover for the labour, materials, tools and hired equipment such as scaffolding and plant machinery, which are destroyed or damaged. Policies may also provide cover for huts and other temporary buildings at a construction site.
Common exclusions to contract works insurance
Some types of damage are commonly excluded from contract works insurance. For example, cover for damage caused by terrorism or so-called ‘acts of God’ such as aeroplane crashes or meteorite impacts are generally ruled out in policy wording.
Contract works insurance also only covers damage to a project that is under construction. For example, if a commercial property is extended by the addition of two separate annexes – one of which is completed and the other is underway – when fire destroys the entire building, only the unfinished part of the site would be covered by contract works insurance. The completed annex and main part of the building would need to be covered by separate buildings and contents insurance policies.
What level of cover do you need?
Contract works insurance should be sufficient to cover the highest-value project being worked on, including labour and materials. This level of cover is required even if your largest project will be completed over an extended period of time.
For example, if you enter a contract to build a development of seven houses over 18 months at a rate of £3 million, your contractor’s insurance cover level should be £3 million, even though this value would actually be spread over two years.
Other types of insurance your contractor might require
You might wish to take out contract works insurance as part of an umbrella policy covering other areas of liability. For example, taking out a single policy to cover employer’s liability, public liability, commercial premises, motor and trade credit risk is likely to prove more economical than taking out separate policies for each of these areas.
Purchasing cover in this way will also help to ensure that you do not leave any areas of liability uncovered, or that liability is disputed between multiple insurers in the event of a claim. It is also easier to plan your outgoings and manage administration and renewals, by making everything fall due on one date rather than trying to manage multiple renewals throughout the year.
Why it pays to take out quality insurance
How much would you be impacted by an adverse event at one of your developments? It’s easy to see insurance as a formality, but if you need to rely on it then it truly does pay to purchase a high quality product tailored to your specific needs.
Why not talk to the experts at Stride today about how we can help you find the best product for your circumstances?