Cover for your Existing Structure during Construction Works
Property Owners who are undertaking refurbishment, renovation or redevelopment works to their property need to consider who is providing cover for their existing static asset which is to be retained on site once the site has been handed over to a contractor. Most property insurance policies will contain a provision which restricts or excludes cover for damage to property over the course of construction works being carried out. In the event of loss or damage during the construction period, alternative cover will often need to be sourced.
Under most construction contracts, the site will be handed over to the contractor for the duration of the works, and often the contractor will be required to provide an indemnity to the Owner for loss or damage to property of the principal. However, the Australian Standard suite of contracts do not require first party insurance to cover damage to the existing structures and owners are often reliant on the third party liability cover of the contractor to provide indemnity for such loss and damage.
A contractor’s liability policy will only respond in circumstances where the contractor is legally liable for the loss or damage – leaving a potential grey area of coverage when loss or damage is caused by an external factor (such as weather perils). This potentially leaves owners exposed to uninsured losses during construction.
First Party Cover for existing structures during construction is available in two ways:
- Your property insurer agrees to provide cover and remove the restriction relating to property that is undergoing construction. This may attract additional premium or a higher deductible applying during the construction. Insurers are likely to want to retain full rights of recourse against the contractor as a condition of cover. Some property insurers are flexible in relation to this cover, others will not provide such amendment under any circumstances;
- Including “existing structure cover” under the contract works policy in place for the construction being undertaken. It is usually easier for the owner to procure the contract works cover on a project where there is an existing structure to be retained on site – this is “alternative 2” on the Australian Standard suite of contracts. This is particularly the case where the value of the existing structure is higher than the value of the works being undertaken.
It is important for Property Owners to consider this exposure and how to manage the risk well prior to issuing a request for a proposal from contractors. It is also important to discuss options with your insurers prior to renewal to ensure that cover is available if needed. If insurers cannot assist, alternative insurers may need to be considered. Further, draft contracts should be issued to tenderers with a specific requirement to provide all peril cover over the existing asset for the duration of the works. The successful tenderer will need to provide documentation to prove cover has been placed for the existing asset.
Failure to consider cover for the existing structure prior to works commencing can leave the asset uninsured. This could leave property owners in breach of their banking covenants and exposed to significant financial losses should loss or damage occur.
Property undergoing redevelopment is at a higher risk of loss or damage than a static asset. Bellrock can provide guidance to property owners considering property improvement. This assistance includes setting the contractual framework for principals, providing options for cover, ensuring contract compliance as well as negotiation of principal arranged coverage on your behalf to ensure your asset is comprehensively protected.
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