Do You Have to Insure Your Customers Existing Building

Where a builder undertakes a renovation, alteration, extension or addition to a building there remains considerable confusion amongst builders, owners and insurers as to the requirement to insure the existing structure that may or may not be part of your contract.

An existing structure is generally defined under most Construction Risks insurances as anything that existed on the site prior to the commencement of the contract, including sheds, garages, swimming pools etc.

This is problematic as you may be undertaking work on a pre-existing wall that involves the stripping of its plaster covering, possibly the renewal of some of the framing timbers and the replacement with new timber, plaster, finishing and painting etc. So what does the Construction Risks policy normally cover?

Generally the insurance will cover any new works. So in the above example this would mean the new bits of timber used and the plaster, finishing and painting, but not the existing: frame, insulation, external cladding, wiring etc. As you can appreciate, when a major loss occurs, it can prove difficult to differentiate the inherent value of the existing property and the value of the work you have undertaken.

It is therefore best to remove this difficult interpretation by requesting any existing structures be insured specifically under your Construction Risks insurance policy. Whilst this may attract an additional premium you should normally be able to pass this onto your customer as their existing insurance in most cases will cease to apply.

Another example that is clearer is where there is a clear demarcation line between the existing structure and your contract work, for instance a rear addition where no other refurbishment forms part of the contract. In such cases it is dependent upon what your contract with the owner says. Under most architect drafted contracts the builder is required to insure any existing property irrespective of your involvement with that structure or the existence of ongoing building and contents insurance carried by the owner.

We have undertaken a brief analysis of the major House and Contents insurance policies to see what they say in this area.

Generally the following restrictions/conditions apply:-

  • Some nominate a contract value up to which the work and existing buildings remain insured under the policy. These limits vary between $25,000 and $100,000!
  • Some apply a blanket exclusion such as Coles Insurance;
  • All require the owner to notify the insurer of what work is proposed.

We have also examined some "Business Package" policies under which many commercial buildings are insured.

  • Some nominate a contract value such as the lesser of $500,000 or 20% of the sum insured;
  • Most will exclude damage to any existing structure undergoing contract work.

Again is not very clear what is intended to be covered. If you are working only on a part of the building does this mean the remainder of the building is insured? Or does it mean that only that part upon which you are working is excluded?

What you need to do:-

      1. Check your contract - If an Architect drafted contract you will have little choice but to arrange a separate insurance as part of your Construction Risks insurance for the project. Make sure you have already priced into your project budget the cost of this insurance.
      2. Secure a Certificate of Currency - Due to the requirement of most existing insurance policies for the owner to notify their insurer of the proposed works you should protect yourself by requesting your customer produce a Certificate of Currency for their existing building insurance noting the proposed works. This guarantees that the insurer has been notified and cannot deny cover due to the owner's failure to advise.
      3. Contact us to discuss the inclusion of the existing structure under your construction risks policy.
      4. In every case take photographic evidence of the existing structure particularly noting any existing defects. Depending on the extent of the proposed works, or the state of the existing structures, insurers may request an independent Dilapidation Report. Regardless of the insurer's insistence on obtaining an independent report, it is often a good idea to secure one anyway, and have the owner agree to its findings.

You can insure the existing structure on two different bases.

     A.  To rely purely upon your legal liability for causing the damage - this generally requires no notation on your policy. Provided of course that it does not exclude such existing property. Check your wording.

This relies upon you having a "Legal Liability" for the damage and does not guarantee cover will exist for the owner if, for example the house is struck by lightning prior to your completion of the work. We do not believe you would be held legally liable for a lightning strike! Again, check the wording of your contract, as this level of cover may not satisfy your contractual obligations.

     B.  To remove doubt request "Static" cover. This specifically notes the existing structure on your policy and generally will require you to pay an additional premium to have it insured. It is then insured against generally the same risks as your work.

 In all cases, when undertaking work where an existing structure is present it is wise that you thoroughly investigate who is expected to insure the existing structure.

It is however important to note that contract works insurance policies are unlikely to extend to cover any contents, and this should be highlighted to the homeowner.

At the bare minimum you must agree with the owner as to the existence of any defects, minor or major, that already exist BEFORE you commence work.

No matter what - call us to discuss your requirements BEFORE commencing work! 1800 077 933

 
 

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