Contract Works Insurance Explained

Introduction to Contracts Works Insurance

Contract works insurance is essential for any business or individual undertaking construction work in the UK or Australia. With the potential for high-value assets and equipment on site, as well as the ongoing progress of the project, having adequate insurance coverage is crucial.

This article will provide a comprehensive overview of contract works insurance, explaining key definitions, inclusions, exclusions, costs and essential considerations when taking out a policy. We’ll delve into the specifics around what contract works insurance covers, why businesses need it, how much it costs, equipment options and tips for choosing the right policy.

Whether you’re a contractor, developer or homeowner undertaking renovations, understanding contract works insurance is vital for mitigating construction risks. Keep reading for everything you need to know about securing your work.

What is Contract Works Insurance?

Contract Works Insurance Meaning and Definition

Contract works insurance covers physical loss or damage to contract works, whether permanent or temporary, while the works are being undertaken. This includes cover for the contract’s materials, fixtures, fittings and equipment.

The terms ‘contract works insurance‘ and ‘contractors works insurance’ are often used interchangeably, however, contractors works insurance can sometimes refer to a contractors’ general risks and liabilities, while contract works refer specifically to insurance for the contract site and work itself.

Contract works insurance differs from standard property insurance that a business may hold, as it is designed specifically for construction projects rather than covering a completed asset. It also differs from ‘contractors all risk’ insurance, which is broader and includes third party liability cover.

In the UK, contract works insurance covers projects undertaken in England, Scotland, Wales and Northern Ireland. In Australia, contract works insurance policies are generally consistent across all states and territories.

Contract Works Insurance Meaning and Definition

To summarise the key definitions:

• Contract works insurance covers physical loss or damage to temporary and permanent works undertaken as part of a construction contract. This includes materials, fixtures, fittings and construction equipment involved in the contract works.
• It is a specific form of insurance for contracts and construction projects, differing from standard property insurance and contractors all risks covered.
• Policies are available across the UK and Australia, with minor regional variations.
• Also referred to as ‘contractors works insurance’, however this can have a broader meaning beyond just the contract works themselves.

A clear understanding of contract works insurance and how it differs from other construction policies is essential when considering the right cover for your project.

Understanding Key Contract Works Insurance Terminology

Diving into contract works insurance requires a solid grasp of its specific terminology. Here’s a more detailed look at some of the pivotal terms to understand:

• Construction/Erection All Risks (CAR/EAR): This is another term frequently used to refer to contract works insurance. It encompasses a wide range of coverage against the risks associated with construction or erection projects.
• Indemnity Period: This specifies the duration during which claims can be made under the policy. While it often defaults to 12 months, specific circumstances or extended projects might necessitate its extension.
• Practical Completion: This stage marks when construction or contract works are deemed finished, meet the stipulated requirements, and are ready to be handed over to the client or owner.
• Existing Structures: These refer to any pre-existing infrastructures such as buildings, roads, bridges, or other facilities near the current construction or contract site.
• Hot Works: Activities within construction that involve the generation of heat, such as welding or cutting. These tasks inherently carry a higher risk of fires or explosions.
• Cold Works: These are construction tasks considered to be of a lower risk in nature. Examples include activities like painting, landscaping, or plastering.
• Major Perils: These are the significant threats or risks that the insurance policy covers, including catastrophic events such as fires, storms, floods, or earthquakes.
• Minor Perils: In contrast to significant perils, these encompass less severe risks like falling objects, accidental damages, power surges, and other such incidents.
• Professional Fees: Costs associated with professionals like architects, surveyors, and designers, especially when their expertise is needed to assess, repair, or rebuild works after damage.
• Expediting Expenses: These are the costs incurred to fast-track the reconstruction process. They aim to minimise delays and ensure the timely completion of projects.
• Debris Removal: After an adverse event, this pertains to the expenses involved in cleaning up, clearing out, and responsibly disposing of damaged property or construction waste.
• Reinstatement refers to repairing damaged sections of the contract works, restoring them to their original state.
• Betterment: While reinstatement focuses on bringing works back to their original state, betterment indicates improving them. Insurance usually covers only reinstatement, meaning restoring to the prior condition and not any enhancements.

Acquainting yourself with these terms clarifies policy documents and empowers you during discussions with insurance brokers or when assessing coverage. Whenever faced with uncertainty, it’s always advisable to consult with your broker to ensure you fully comprehend the nuances of your policy.

What Does Contract Works Insurance Cover?

Contract works insurance provides cover against unforeseen physical loss or damage to contract works. This includes damage to temporary or permanent works, materials, fixtures, fittings, equipment and machinery involved in the contract.

Coverage often includes situations such as:

• Fire, lightning, explosion, storm, tempest, flood, water damage, impact, earthquakes, subsidence
• Accidental damage or destruction of insured property
• Theft or attempted theft
• Malicious damage and vandalism
• Damage during transit or while temporarily removed from the contract site
• Legal liability for damage to third party property

In addition to covering physical property and structures, contract works insurance will typically cover costs such as:

• Professional fees incurred when reinstating or repairing contract works, such as architects, surveyors etc
• Debris removal costs
• Expediting expenses to accelerate repair or replacement
• Costs for complying with statutory regulations when reinstating damaged works

Specifics of Contract Works Insurance Policy Wording

It’s essential to read and understand the full policy wording when taking out contract works insurance to ensure you have the right cover for your specific project and needs. Key aspects to consider in the policy wording include:

• The contract value insured should match the contract works’ total weight.
• Territorial limits – policies may be limited to a particular geographic area.
• Maximum indemnity period – the covers duration, often 12 months but can be extended.
• Specific inclusions or exclusions for certain events, materials, temporary works etc.
• Any specific security measures required by the insurer.
• Temporary removal of insured property from the contract site.
• Sub-limits or inner-limits apply to certain types of claims.
• Who is the insured party – the policy owner, principal contractor, subcontractors etc.

Carefully reviewing the contract works insurance policy wording ensures full understanding of the cover, limits, terms and conditions. Seeking advice from an insurance broker on the appropriate policy structure is highly recommended.

What Doesn’t Contract Works Insurance Cover?

While contract works, insurance provides extensive cover for physical works and materials; standard exclusions apply under most policies. Common exclusions include:

• Normal wear and tear, gradual deterioration of materials over time
• Wilful misconduct or gross negligence by the insured party
• Pre-existing damage not caused during the policy period
• Consequential losses such as penalties for delay or non-completion of works
• Loss of profit, business interruption losses
• Damage from terrorism, war or nuclear risks
• Pollution or contamination clean-up costs
• Asbestos removal
• Cyber risks such as data loss, hacking, viruses etc
• Damage to existing adjoining structures (covered under contractors all risk insurance)
• Landscaping, plants, trees, livestock etc
• Motor vehicles registered for road use
• Watercraft and aircraft

It’s important to know these standard exclusions when taking out a contract works policy. Additional cover options may be available from some insurers against certain exclusions, for example, cover for existing adjoining structures. Read the policy wording carefully and seek clarification from your insurance broker on any aspect of the cover that is unclear.

Do I Need Contract Works Insurance?

A contract works insurance policy should be strongly considered if you are undertaking any construction contract or project. This includes:

• Property developers
• Construction companies
• Builder renovating homes
• Trade contractors like plumbers, electricians, carpenters etc
• Companies fitting out leased office spaces
• Infrastructure and civil engineering firms
• Facilities management contractors
• Mining and heavy industry construction works
• Homeowners undertaking renovations or extensions to their property

Even small-scale construction jobs like kitchen renovations could benefit from contract work cover if an unexpected insurance claim disrupts the completion of the work.

Is Contract Works Insurance Compulsory?

In most cases, contract works insurance in not legally compulsory. However, the party you are contracting for may require you to hold adequate contract works to cover third-party damage and liability. This is common on major construction projects where the principal contractor mandates certain insurance coverage from all sub-contractors.

Some specific instances where contract works insurance may be compulsory include:

• Residential building work requiring home warranty insurance in Queensland.
• Construction projects financed by a bank or lending institution may stipulate contractors hold contract works cover.
• Government tenders often require contractors to hold adequate insurance.
• Commercial clients and developers may require contractors to hold contract works policies.

While not always a legal requirement, having appropriate contract works insurance may be stipulated in your contractual agreements or is an important risk management measure.

Importance for Different Regions

Contract works insurance is commonly utilised across every state and territory in Australia and the UK. Specific instances where it is essential include:

Queensland

• Residential construction requires Home Warranty Insurance, which includes contract works cover.

Victoria

• Domestic building contracts require Home Warranty Insurance, including contract works.

New South Wales

• Home building compensation fund provides cover for contract works.

UK

• Contract works insurance is commonly required on construction projects across England, Scotland, Wales and Northern Ireland.

Whether it is a legal requirement or not, contract works insurance protects all regions for construction companies and contractors of all sizes. Reviewing your specific contractual and regulatory requirements as they apply in your area is recommended when considering contract works insurance.

Cost and Calculations

How Much Does Contract Works Insurance Cost?

The cost of a contract works insurance policy can vary substantially based on several factors. These include:

• The contract value – insurers will require the contract’s total value to be insured, which forms the maximum claim limit. Higher-value contracts cost more to insure.
• Contract duration – longer project duration involves greater exposure for insurers, increasing premiums.
• Type of works – complex, hazardous activities like civil works cost more than simple renovations.
• Location of the works – remote regions prone to cyclones, floods etc have higher risk.
• Past claims history – previous claims by the insured may increase premiums.
• Excess levels – higher excesses reduce premiums but increase the initial outlay if claiming.
• Existing site risks – brownfield sites with more exposures may cost more.
• Security – stringent site security and loss prevention measures can reduce premiums.

As a general guide, contract works insurance can range from 0.25% to 5% of the total contract value insured, however, it’s best to seek a quotation specific to your project. Using a contract works insurance calculator lets you input details to receive an indicative premium cost.

How to Get Contract Work from Insurance Companies in the UK

Many of the leading insurance companies in the UK also have major construction arms that require contracting partners. Some tips for contractors looking to secure this work:

• Maintain adequate insurance like contract works and contractors all risk policies. This professionalises your business.
• Attend industry networking events where you can engage with insurers directly.
• Get listed on insurer-preferred supplier panels by promoting your track record.
• Monitor insurer websites and tender portals for upcoming contract opportunities.
• Focus on specialised skills like flood remediation that insurers require after claim events.
• Promote your availability to help insurers recover from peak claim periods like severe weather events.
• Clearly communicate your value proposition – safety, quality, reliability, experience etc.

Having the right insurance covers and an effective business development strategy can help secure lucrative work from UK insurance companies needing construction and contract partners.

Equipment and Additional Coverage Options

H3 | Insuring Equipment: Own Plant Tools vs Hired-in Equipment

Contract works insurance will typically cover equipment owned by the contractor and hired-in plant and tools. However, it is essential to understand how this works:

Own Plant – Items owned by the contractor are covered for their replacement value under a standard contract works policy. This includes tools, equipment and temporary construction buildings owned by the insured contractor.

Hired-in Plant – For plant, tools and equipment hired by the contractor, contract works insurance covers their replacement hire cost rather than the asset value. This means the cost to re-hire the equipment.

Contractors should ensure:

• The hiring company’s insurance covers any hired equipment during transport and when off-site.
• Excess waiver is taken on hiring agreements.
• Own equipment is covered for total replacement value.

Discuss equipment coverage with your insurer or broker when taking out contract works insurance. Plant and equipment represent a major exposure.

The Lender’s Perspective: First Loss Payee Considerations

When a bank or other lending institution finances a contract works project, the lender will want to protect their interest in the works. This means:

• They may require the contractor to hold contract works insurance, naming them as the “first loss payee”.
• Any insurance claim proceeds must first go to the lender before the contractor.
• The lender will want confirmation of policy currency from the insurer during work.
• The loan contract will stipulate terms around insurance and evidence required.

By naming the lender as first loss payee in the policy, they effectively take priority over claim funds up to the value of financing provided for the works. This ensures the asset in which they’ve invested is adequately insured.

Contractors should be aware insurers will generally accommodate standard first-loss payee conditions for lenders. This gives the lender priority over any received claim monies.

Choosing the Right Contract Works Insurance

Contract Works Insurance vs Contractors All Risk

Contract works insurance covers explicitly physical loss or damage to contract works at a site. This includes materials, temporary buildings, plant and equipment being used to execute the contract works.

Contractors all risk (CAR) insurance provides broader coverage, including:

• Contract works cover as above.
• Liability cover for injury or damage to third parties.
• Cover for surrounding existing structures near the works.
• Protection for equipment in transit and when off-site.

For most construction projects, a contract works and general liability policies are suitable. CAR insurance can benefit those with complex exposures who prefer a single, combined policy.

Contract Works Insurance Existing Structure

Standard contract work insurances only covers structures being newly constructed, renovated, extended etc. It does not cover sudden damage to existing adjoining structures near the contract works.

This can be addressed by:

• Taking out contractors all risk insurance which includes existing structures cover.
• Securing a standalone existing structures extension to the contract works policy.
• Having the client insure existing structures under their property policy.

Discuss existing structures exposure with your insurer or broker to manage this risk. Leaving it uninsured could be disastrous if adjacent buildings suffer damage.

How to Buy Contract Works Insurance?

Contract works insurance can be obtained by contacting insurers directly or via an insurance broker. Using a broker is highly recommended for several reasons:

• Brokers access many insurance markets to find you the right policy at competitive terms.
• They package policies and handle the paperwork and administration.
• Brokers have specialist expertise to tailor policies and provide risk advice.
• In the event of a claim, your broker handles liaison with insurers.

When purchasing any form of construction and engineering insurance, using an experienced broker provides guidance, convenience and support. They work on your behalf to secure the right covers.

Contact Works Insurance for Residential Projects

While often associated with major construction projects, contract works insurance is also important for residential jobs like renovations, extensions and new home builds.

For homeowners acting as owner-builders, taking out cover protects if an event like storm damage interrupts the completion of the works. Having adequate residential contracts works insurances help ensure the project can be repaired and finished.

Some tips when arranging contract works insurance for a residential project:

• Inform insurer if you are an owner-builder rather than a registered builder.
• Consider staged policies if completing works over an extended timeframe.
• Ensure cover for any high-risk activities like hot works or demolition.
• Ask about any special terms for heritage-listed homes.
• Disclose details of surrounding trees, slopes and water exposure.
• Check your location’s specific regulations for residential building work.

Discuss the nuances of your residential contract works project with your broker to tailor an appropriate policy. This provides essential protection for homeowners investing in improving their property.

Special Considerations for Infrastructure Projects

Major infrastructure construction projects like roads, rail, tunnels, bridges, dams and utilities have unique contract works insurance requirements including:

• High contract values – projects can involve billion-dollar policy limits requiring insurers with substantial capacity.
• Long durations – works may continue for many years, requiring cover that can be extended.
• Remote locations – exposure to risks like cyclones, flooding and landslips increases in remote sites.
• Environmental factors – wastewater, chemical hazards, water crossings and other pollutants need addressing.
• Interface with live operations – insuring works adjoining functioning rail lines, live power stations etc.
• Public safety – damage or disruption to infrastructure carries significant third-party liability risk.
• Natural disasters – vulnerability to earthquakes, storms and floods.

Terrorism – infrastructure sites can be considered targets, calling for specialist cover.

With major public and private infrastructure projects, it is vital to partner with experienced insurers and brokers who understand the unique risks and can tailor an appropriate contract works program.

Contract Works Insurance for Mining Projects

Constructing mines, quarries, refineries, processing plants and heavy industrial facilities comes with its own contract works insurance challenges, including:

• Remote locations are prone to extreme weather, flooding and challenging site conditions.
• Specialist equipment like draglines, excavators and machinery cost tens or hundreds of millions to repair or replace.
• Toxic and hazardous substances used and stored on sites.
• Risk of pollution incidents causing liability exposures.
• Specialist contractors are needed for electrical infrastructure, blast loading, voids etc
• High-value temporary accommodation villages and facilities.
• Pressure for urgent repairs to keep projects operational.
• Security risks in remote regions include theft and vandalism.

Mining contractors require an insurer experienced in underwriting these unique risks. A specialist broker can help tailor and arrange appropriate mining contracts works insurance.

Insurance for Ongoing Maintenance and Minor Works

For contractors engaged in ongoing maintenance, service and minor works agreements, annual contract works policies can provide a flexible solution covering multiple small jobs. Key features include:

• Blanket cover for all jobs within the policy aggregate limit.
• Very low excess making it cost effective to claim even for minor losses.
• Covers own and hired equipment being transported between jobs.
• No need to specifically declare each new job, saving administration.
• Can combine public liability to have a single, simplified program.
• Trades can take out cover in their own name as principal contractors.
• Premiums are based on estimated annual contract values.

This annualised approach suits plumbers, electricians, carpenters, HVAC technicians and similar service contractors requiring seamless contracts works insurance.

Contract Works Cover for Subcontractors

If working on-site as a subcontractor, being covered by the head contractor’s contract works insurance is typical. However, subcontractors should still consider:

• Obtain evidence, such as a certificate of currency that you are a named insured party.
• Review policy documents to ensure adequate cover for your contract scope and liabilities.
• Hold your public liability insurance for third-party losses.
• Insure own plant, tools and equipment under an industrial unique risks policy.
• For high-risk activities, consider taking out project-specific contract works cover in your own name.

While relying on the principal contractor’s policies can be suitable, understanding your specific exposures as a subcontractor is prudent. Liaise with your broker for the right insurance approach.

Contract Works Claims Case Studies and Examples

Storm Damage to New Housing Development

A housing developer was building an estate of 4-bedroom family homes. With roof framing complete on two houses, an intense storm with gale-force winds caused significant roof structure damage. The contract works insurance claim covered the costs to demolish and rebuild the roof framing to the lock-up stage.

Fire in Office Refurbishment

An electrical fire broke out in an office undergoing refurbishment, sparked by flammable construction materials left too close to a portable heater. The fire and smoke damage was extensive. The contract works policy responded by covering repair costs, including demolition, clean-up, reconstruction of damaged areas, plus replacement of fixtures, fittings and office equipment lost in the fire.

Flood Damage to Road Project

A major flood caused a creek to overflow, washing away sections of a new road under construction and key earthmoving equipment. Contract works insurance provided cover to replace the damaged road infrastructure and hire a replacement earthmoving plant so project delays could be minimised.

Collapse of Warehouse Extension

The partial collapse of a warehouse extension under construction was found to result from design defects. The contract works insurer disputed the claim on the basis the collapse was not an insurable peril. After a protracted legal dispute, the policy responded due to ambiguity over policy terms. This demonstrates the need for legal review of policy documents.

Cyclone Damage in Northern Australia

With extensive building work underway across northern Australia, cyclones are a significant contract work hazard. High winds can badly damage a construction site, from destroyed roofs to flooding rains. The right emergency response and adequately insured repair costs are key to recovering from cyclone damage.

Reviewing real claims examples provides helpful insights into the importance of contracts works insurance and how policies respond to loss events.

Contract Works Insurance Checklist

When arranging contract works insurance, key considerations include:

• 💡 Contract value reflects the total cost of permanent and temporary works.
• 💡 All parties involved are adequately covered like subcontractors.
• 💡 Scope aligns with the specific project and activities.
• 💡 Liability extension added for third-party damage.
• 💡 Existing adjoining structures covered.
• 💡 Insured for total replacement value, not just contract price.
• 💡 Plant and equipment covered on and off-site.
• 💡 Excess levels balance premium savings and claim outlays.
• 💡 Wording reviewed for any ambiguous or unclear terms.
• 💡 Insurer can handle significant losses.
• 💡 Broker provides expert claims handling assistance.

A systematic checklist ensures all aspects of the contract works insurance policy are addressed and understood before works commence.

Frequently Asked Questions

How Much Contract Works Insurance Do You Need?

The contracts works insurances should cover the full value of the contracted works. This means the:

• Construction costs of permanent and temporary works.
• Value of materials incorporated.
• Equipment owned and hired for the project.

The total sum insured should also consider professional fees, debris removal, and escalation. Having under-insurance could lead to large unrecoverable losses in the event of a claim. Discuss the adequate contract value with your broker.

What’s the Difference Between Contractors All Risk Insurance and Contract Works?

Key differences include:

• Contract works insures the contract works only. CAR provides broader cover.
• CAR policies include third-party liability cover not in contract works.
• CAR covers surrounding existing structures near the contract site.
• CAR insurance continues to cover equipment and plant when in transit or off-site.

A combined contract works and general liability policy is suitable for most contractors. CAR insurance can benefit those with complex risk exposures under a single policy.

Can You Provide an Example Contract Works Insurance Claim?

A construction company was half way through adding a second-storey extension to a home when a major storm caused a tree to fall and crash into the new extension, causing significant damage. As the project was insured under a $250,000 contract works policy, the storm damage repair costs of $150,000 could be recovered. The policy covered the costs to safely demolish and remove the damaged section of the new works and rebuild the extension to its original specifications. This was achieved within the maximum indemnity period, allowing the project to be completed on time as intended.

This demonstrates the importance of having adequate contract works insurance in place for the full value of the project. Even a single event like a storm can severely impact construction schedules and budgets. The right policy protects the completion the work.