Existing Structure Insurance — who is responsible?

One of the most overlooked risks when builders are engaged to perform renovations/additions, or on takeover projects is just who is responsible for insuring the existing buildings?

It is essential that insurance for the existing buildings/completed works is discussed and agreed with the property owner prior to any works commencing.

Failing to do so may lead to disputes, poor public relations or significant uninsured losses.

So who is responsible for insuring the pre-existing property during construction?

Check the Contract

The first place both parties should check is the construction contract. In most cases the contract will clearly set out the obligations of each party to arrange the various insurance policies required for the project.

The most common contractual position in standard domestic building contracts is for:

The builder to arrange:

• Construction Insurance to cover damage to the actual works in progress under contract.

• Public Liability Insurance to cover property loss or personal injury suffered by a third party.

The owner to arrange:

• Insurance for the existing property and contents.

If the contract is silent on which party is responsible for insuring the existing property, then it will continue to be the property owner’s responsibility as it was prior to the contract being entered into.

It seems relatively simple however there are critical issues that need to be addressed to avoid confusion, disputes and uninsured losses.

It’s dangerous to assume

It’s common for both builders and owners to assume that the builders Public Liability policy will cover the owners existing property if it is damaged during the project. But the builders Public Liability policy responds to injury or damage to third party property (including owners’ property) when the builder is legally liable for the damage. Simply because the builder is performing works on the site does not automatically mean that the builder is responsible for all occurrences of damage that may occur to the existing property.

Think of the situation where storm water enters a property during an extension to the existing building causing damage to the existing property and contents. The builder’s Public Liability policy responds when the builder is liable, meaning there has been a degree of negligence. What if the water entered through a different part of the building which is not under construction? What if the builder has taken all reasonable care to protect the property ensuring generous roof coverage by tarpaulins, correct ties, adequate overlapping, tarpaulins in excellent condition, ample weights used and appropriate consideration given to the foreseeable weather? What if the builder is not legally liable for the damage? How would a court of law view this? The answers to these questions are uncertain and rely on an interpretation of law. You can be sure that if the builder’s Public Liability insurer believes their client (the builder) is not liable they will seek to decline the claim and defend any claim the owner brings against the builder – which is not a situation any builder or owner wants to find themselves in.

Owner’s Insurance

After the contract has been checked and it has been established that the owner must maintain or obtain insurance for the existing buildings, another check needs to be performed.

Most home and contents policies now contain a clause that excludes storm or water damage when water enters the home as a result of building works. Many of the same home and contents policies also contain clauses requiring the homeowner to notify the insurer when building works occur. When notified, the insurer will often cease cover if the alterations or additions are performed on the home over a certain value. To avoid an uninsured loss, it is critical that the owner checks their policy wording or contacts their insurer to ensure that the cover they have in place will respond if alterations or additions are being undertaken. If the owner is unable to secure insurance for the existing buildings, Master Builders Insurance Brokers (MBIB) may be able to assist.

Another consideration that may affect the insurances is whether the property is to remain occupied or if the owner is moving out for the duration of the works. Again, MBIB can provide advice for each specific situation and arrange insurance as required.

Why does the Contract Works insurer need to know if existing structure coverage is required?

A contract works policy when extended to include cover for an existing structure will cover occurrences of damage to the existing structure which are outside of the builder’s control, i.e., malicious damage, storm etc. As the policy is based on the contract works being completed by the builder, which is disclosed as annual turnover or the value of the contract; the policy doesn’t automatically cover the existing structure. Each existing structure will have different sums insured and construction types, which are considered by the Contract Works insurer when adding the existing structure to cover. The contract value plus the insured value of the existing structure then becomes the total value which the policy will respond to cover once the existing structure is added to the policy.

In summary — check the contract, communicate with the owner to have them check the policy wordings and discuss with their insurer, and seek advice from your broker. That is the best way to avoid disputes, poor public relations, or worst of all, large uninsured losses.

MBIB is a specialist construction broker and provides a free service to all MBA members to review your insurance program and provide alternate pricing and guidance on coverage.