Contract Works Insurance Gaps for Australian Builders

What it is

Contract works insurance covers accidental physical loss or damage to the works during construction. It is the policy that rebuilds the frame after it burns.

The NSW entry in this knowledge base explains the cover. This one explains where it fails. Almost every reduced or declined claim traces back to a handful of gaps in the schedule, the conditions or the exclusions of the policy the builder already holds.

The Insurance Contracts Act 1984 (Cth) sits over all of it. Section 54 stops an insurer refusing a claim outright because of an act or omission after the contract was entered. It does not stop the insurer reducing the payout by the amount that fairly represents the prejudice it suffered. Reduction, not refusal, is where these fights land.

The sum insured and the average clause

Builders set the sum insured at the contract price. The contract price is not the cost of rebuilding what burned down.

Reinstatement cost includes escalation between signing and the loss, demolition, debris removal, professional fees plus materials in transit or stored off site. Leave those out and you are underinsured. The average clause, also called co-insurance, then cuts every claim in proportion.

Worked example. Contract price 800,000 dollars, sum insured 800,000 dollars. Fire at month 14. Reinstatement value at the date of loss, once escalation, demolition, debris and fees are counted, is 1 million dollars. You are insured for 80 per cent of value. A 200,000 dollar partial loss pays at 80 per cent, so 160,000 dollars, less the excess. The builder funds 40,000 dollars from margin on a job that has not settled.

Average applies to partial losses, which is nearly every claim.

Existing structures: the A&A gap

This is the single biggest gap in residential work. A contract works policy covers the new works. It does not cover the existing house those works are attached to unless existing structures are listed in the schedule with their own sum insured. Burn down the kitchen you were extending and the extension is covered. The house is not.

The owner's home and contents policy is not the fallback. Insurers routinely restrict or decline cover once the property becomes a building site. NSW Government guidance tells owners to notify their home insurer in writing before construction begins for exactly this reason. Most do not.

Faulty workmanship: the part versus the damage

Contract works policies exclude the cost of rectifying defective work. They usually cover the resulting damage it causes to the rest of the works.

The waterproofer misses a corner. Redoing the membrane is the defective part and it is excluded. The soaked plasterboard, cabinetry and flooring are resulting damage and they are usually covered. Most disputes argue about where that line sits, so scope the claim carefully. "Waterproofing failure" invites a declinature. "Water damage to fitout following membrane failure" describes covered loss.

Conditions that quietly void the claim

• Unoccupied or vacant premises conditions, which bite on stalled jobs
• Theft without violent or forcible entry, which excludes most site tool theft
• Storm and water damage to a structure not yet at lock-up
• Testing and commissioning, often excluded or sub-limited

When the policy stops running

Many policies expire at practical completion. The defects liability period runs another 12 months. Damage caused while the builder is back on site during the DLP falls into that gap unless the policy carries a maintenance extension.

A subcontractor's own policy does not cover you. Either the head policy names subcontractors as insured parties or you collect a certificate of currency and principal's indemnity extension from every trade.

Statutory home warranty fills none of these gaps. In NSW it responds when the builder dies, disappears, becomes insolvent or loses their licence. It does not pay for a fire.

The signal and what to do

• An A&A job with no existing structures item in the schedule
• A sum insured that matches the contract price to the dollar
• A policy expiry equal to practical completion on a job with a 12-month DLP
• A stalled job past 30 days with no notification to the insurer

Set the sum insured at reinstatement cost, adding escalation, demolition, debris and fees explicitly. Confirm existing structures cover on every A&A job before you take the deposit. Diarise policy expiry against DLP expiry, not practical completion.