As a construction project nears completion, the overall value of works will be at its highest. It’s at this point that contractors and owners will be at the greatest risk of suffering significant loss or damage from an insured event such as theft, property damage in addition to weather related perils.
Recent years have seen instances of theft from construction sites rising as a result of the increased cost of building materials alongside scarcity of items such as timber and copper wiring. Add to the mix the near completion of a construction project, meaning that high value prime cost items such as air conditioners, ovens, hot water systems etc. will have been installed, and the site becomes even more attractive to criminals.
As such, it is important for contractors and owners to understand when their insurance cover under a construction (material damage) policy will expire and to ensure alternative insurance arrangements are made at the appropriate time.
This article will look at cover under a construction material damage policy, and in particular when coverage for loss or damage expires under the insurance contract.
Whilst it is the general intent of a material damage policy to provide cover from the commencement of construction until the project is handed over to the owner, the definition of Construction Period does not always reflect how a project works in practice.
For example, a typical definition of the Construction Period under many Australian market wordings is as follows:
Construction Period means
the period commencing:
- on the date of possession of the Site by the Insured; or
- at the commencement date of Works,
and expiring:
- on the date the Works have achieved Practical Completion; or
- on the date the Works are taken over, occupied or put into use by the principal or owner; or
- after the maximum Construction Period specified in the Schedule,
whichever occurs first
From reading the above, it’s clear when the policy commences, namely from the date of site possession or when the works commence.
The expiry date, however, is not as clear.
Perhaps the most important phrase to note is “whichever occurs first” meaning that the policy will expire as soon as either (c), (d) or (e) have been met, not whichever of these options is selected or preferred by the Insured. In practice, this means that the policy could expire prior to practical completion, in circumstances where the owner occupies the premises or when operations commence from the building (despite practical completion not being achieved).
Contractors and owners should also note that the definition of Practical Completion does not directly align with the standard building industry definition. An example of a definition used by insurers is as follows:
Practical Completion means
the earlier of:
- when the Works has been completed except for minor omissions and minor defects which do not prevent the Works from being capable of being occupied or put into use; or
- when the certificate of Practical Completion is issued.
You can see from this definition that practical completion (and therefore the cessation of insurance cover) is the earlier of either the issuing of a certificate or the works being completed. There is no mention of an occupation certificate, nor is cover provided for the period between completion and settlement of a property transaction (in the case of speculative construction).
This is a very important consideration for contractors as a project nears completion. It is not unusual for there to be some delay in handover of a project to the owners following practical completion as defined above. Council delays, finance delays and contractual disputes surrounding defects can all delay a project handover and potentially leave a property uninsured.
We recently saw a claim whereby a builder completed a significant multi-unit development. A condition of practical completion was to receive an occupation certificate from the council. Upon completion of the works, the relevant application was submitted, however, the council took 3 months to issue an occupation certificate. As a strata policy could not be procured until the occupation certificate was issued, the contractor had to extend their contract works insurance cover during this period. Had they failed to do so, the building would have been uninsured in the event of a loss given it was “practically complete” at the time the occupation certificate was sought from council. The builder incurred significant unbudgeted cost to extend cover under their construction period to insure the project for the duration of this delay.
In another case involving a single dwelling project, the homeowner wanted to complete their own landscaping works following completion of the construction of the dwelling to save costs. As such, from an insurance perspective the works had reached practical completion, and the dwelling was handed over to the homeowner. However, the homeowner was unable to obtain an occupation certificate from the council until the landscaping was completed in line with the planning approval. The builder’s insurance was unable to extend cover whilst the landscaping works were ongoing as the dwelling was now occupied by the homeowner. In turn, the homeowner was unable to secure cover from most home insurers as the occupation certificate had not been issued by the council. Home and contents cover was eventually purchased at a significantly increased cost.
Contractors should check that the contracts they sign with owners make clear the risk of loss or damage which arise at the point transfer to owners. Steps should also be taken to articulate this to customers alongside ensuring that they understand the risks involved prior to a loss or a dispute occurring due a misunderstanding regarding the risk allocation.
Thankfully, insurers are willing to consider requests from Insureds to extend the construction period expiry to align with contractual conditions and practical considerations on specific projects. Such extensions can only be considered on a case-by-case basis following notification and disclosure of the circumstances to insurers which require amendments to the existing terms.
Principals and owners should also consider their own insurance needs. Whilst commercial insurance is readily available, domestic home insurers will often refuse to provide cover to properties until an occupation certificate has been issued by the council. This can lead to delays in settlement (as financiers will not settle loans without insurance cover) and a period where a completed project is uninsured.
Given the complex nature of insurance policy coverage, advice from your risk advisor is critical in relation to your specific circumstances. Your advisor should be able to review your contracts and provide assistance to tailor coverage to dovetail your insurance program. If you have any questions please do not hesitate to reach out to a Bellrock Advisor to discuss.
