Insurance Policies For Property Development Construction

Property development and construction is a risky business and a number of things can go wrong. We only need to look back to the summer of 2022 / 23 where there were several significant weather events that damaged not only established property but many development sites. Beyond that due to the unpredictable and difficult nature of property development it can mean that employees, sub-contractors, public and property are at risk during a project.

As with all risky things in life, you can obtain insurance to mitigate this. We explore in this blog what insurances are available to developers / contractors and how those work. We will cover off public liability insurance, contract works insurance and statutory liability insurance.

Public Liability Insurance

Public Liability Insurance is as it sounds, insurance against claims that may arise from injury, damage or loss to someone else’s property (a third party – the public). This is a policy for the contractor and given most development takes place on a third-party property contractors carry a rather large exposure to public liability risk.

Levels of cover vary typically ranging from $5M - $20M. The level of cover required will be relative to the nature and scale of the contract and works being completed. Each insurance provider will have varied policies, however, most will include cover for legal defence costs as well as damages or compensation cover for any awards by the court.

Public Liability insurance doesn’t cover damage relating to “contract works”. What this means is that if a builder / contractor damages the project they are working on it is their responsibility to resolve that. Because there is no loss to a third party the builder cannot file a public liability claim. They may, however, be able to claim under a contracts work policy (further on that below).

Also, liability that arises from faulty workmanship is also often not covered. Because of this, when damage does occur, it is common to spend time in ascertaining whether the damage is the result of an accident or faulty workmanship. Some insurance providers may offer cover for this, however, it isn’t common and normally increases the associated premium.

Public Liability Insurance isn’t required under New Zealand law, however, most construction contracts will require the builder and subtrades to have Public Liability insurance. We also find that lenders will require evidence of this as part of their due diligence prior to any funding being drawn down.

Incidents that may result in a public liability claim could include damage to public services during civil works or damage to a neighbouring property during construction. These events may have significant costs to remedy which would normally place the contractor at financial risk. Having appropriate insurance offers a level of protection to the contractor which gives surety to both the developer and the lender.

Contract Works Insurance

Contract works insurance is also known as “builders risk insurance”. This is an insurance policy in favour of the contractor for ‘sudden and accidental losses’ to the contract works. These losses tend to occur from fire, theft, vandalism, natural disasters and other accidental damages to the contract works. Policies will include renovations and new builds.

Most if not all construction contracts will require contract works insurance to be in place before works can commence. All lenders will also require the insurance be in place prior to drawing down a development finance loan.

There are a few key things to consider when putting contract works insurance in place. These include;

Insured Sum – the insured sum is the maximum amount the insurer will pay (less any excess) in the event of a total loss (i.e. there is nothing recoverable). For a partial loss the insurer will pay a fair proportion of the insured sum. Because of this, it is integral that the insured sum is large enough to cover the cost of replacing or remediating the damaged property.

For example, if the contracted sum to build a block of townhouses is $3,000,000.00 then you would expect the insured sum to be at least this much. Often, however, it will be greater to give some allowance for professional fees, demolition, cost escalation and other costs that may occur at the time. Note, you will also need to make sure the insured sum is plus GST.

If you are under-insured (i.e. the insured sum is not enough) then the project would be at great risk if there were to be an event of loss. You would be required to bridge the shortfall from the insurance company (likely with equity) which may not be possible.

Cover Period – this is something we often see that needs to be amended. The cover period should be long enough for the contract works to be completed (i.e. it should match your construction programme). We often find it is short of this and lenders will not accept the policy unless it covers this full period.

Regardless of the cover period you opt for as well, contract works insurance will often cease at the earlier of;

• Practical completion
• When 95% of the budget is spent (typically for spec builds). Or;
• When someone starts using the building.

Often practical completion will come weeks before a Code of Compliance Certificate (CCC) is received which can leave the property un-insured for a period of time. Because of this it is crucial that you engage with your insurance broker to understand when the policy expires and arrange a general fire and risk policy to take over from this.

Every loan facility will require the mortgaged property to be insured at all times. Therefore, if you fail to arrange insurance on the property you could face a technical default which is important to avoid. Some insurers will provide ‘completion cover’ which is an add on to your standard policy that automatically ticks from contract works insurance to give you cover for a specified period of time after the construction period is completed.

Policy Exclusions – Insurance policies will often have exclusions, particularly contract works insurance. These are items that if occurring you will not be covered for. It is important to understand these when putting cover in place. We detail some of these below;

• Acts of War.
• Consequential Loss – this term refers to indirect financial loss caused by damage to a business or property. This could include a loss of profits, increased costs, legal and professional fees, loss of revenue from selling a property below market value or additional borrowing costs. You may be able to secure insurance to cover these losses, however, it will often be in the form of a standalone insurance policy particular to consequential loss.
• Natural Hazards – Natural Hazards can be excluded under your contract works policy and you will need to confirm if so and possibly have it added on.
• Faulty Workmanship – contract work policies specifically exclude damage caused by faulty workmanship. This is the requirement of the contractor to perform workmanship at a high standard.
• Existing Structures – Contract works insurance will often only cover buildings under construction and not existing properties on the site.
• Third-party damage or loss – per the above, third party liability is covered under public liability insurance.
• Employee Theft
• Tools and equipment on site – contract works insurance will not cover the replacement of tools and equipment. These should be insured separately.

As mentioned above, it is crucial you speak with your insurer or insurance broker to confirm what is covered and what policy is the best fit for the project.

Statutory Liability Insurance

Statutory Liability Insurance is a policy in place to cover any fines or penalties that arise from unintentional breaches of New Zealand law. This normally includes breaches of the Resource Management Act (RMA), the Building Act, the Environmental Protection Act and the Health and Safety at Work Act.
The insurance will normally cover both the fines and any legal costs associated with defending charges under the act.
You commonly see claims under this policy where there has been pollution from a development site runoff or breaches to the resource consent conditions. This insurance isn’t often utilised, however, can be an important policy to get in place.

Whilst we don’t broker insurance at Lateral Partners we do have relationships with parties who can. If you have an insurance question reach out today and we will seek to point you in the right direction!