Contract works (builders all-risks) insurance for NSW residential builders

What contract works insurance is

Contract works insurance, also called builders all-risks or construction all-risks insurance, covers accidental physical loss or damage to the building works during construction. It is the policy that pays out when fire, storm, theft, vandalism, water damage or accidental impact damages the partially built structure before practical completion.

For a NSW residential builder, contract works insurance sits alongside HBCF (consumer protection for builder default) and public liability insurance (third-party claims for personal injury or property damage). The three policies cover different risks. None substitutes for either of the others.

What contract works insurance typically covers

A standard residential contract works policy covers physical loss or damage to the works while they are under construction. The cover typically extends to:

• The building itself in its partially complete state
• Materials and components on site or in transit to site
• Temporary works (formwork, scaffolding, hoardings) supplied for the project
• Site facilities such as toolsheds and portable office accommodation that belong to the project

Specific perils typically covered include fire, lightning, explosion, storm, flood, water damage, malicious damage, theft and accidental damage. The exact set of covered perils varies by policy. "All-risks" policies cover any cause not specifically excluded, while "named-perils" policies cover only the listed events.

Optional extensions include cover for the builder's tools and plant, cover for existing structures during alterations or additions, professional fees for redesign after a loss, debris removal and escalation cover for inflation in rebuild cost.

Standard exclusions

Contract works policies share a consistent set of exclusions.

Defective workmanship and defective materials: the cost of fixing the defective work itself is not covered, though resultant damage to other parts of the works can be covered depending on the policy.

Faulty design: errors in design documents are typically excluded. Professional indemnity insurance is the policy for that risk.

Wear and tear, gradual deterioration and inherent vice.

War, civil insurrection, nuclear and radioactive contamination.

Cyber risks (typically a separate policy).

Loss or damage discovered after practical completion that is not consequent on an insured event during the construction period.

Existing structures (the rest of the building during a renovation or extension) are commonly excluded by default. For renovation work, the builder must ensure the policy is endorsed to include the existing structure, or the homeowner must hold separate insurance covering it.

Single project versus annual policies

Two policy structures exist.

A single project policy covers one specific build from the start of construction through to practical completion. The sum insured is the contract value of that single project. It is appropriate for one-off custom builds or large projects.

An annual turnover (or annual blanket) policy covers all projects undertaken by the builder during a 12-month policy period up to a declared annual turnover. The sum insured is set per project (typically a maximum value such as $5 million) and the annual premium is calculated on declared turnover. It is appropriate for volume builders running multiple projects simultaneously and is more cost-effective than insuring each project separately.

Who is named insured

The named insured on a contract works policy typically includes the builder and the homeowner as joint insured parties, with the financier or principal noted on the policy where required. This co-insured structure means that if the works are damaged, the policy responds for the benefit of all named parties. Neither the builder nor the owner can subrogate against the other for the same loss.

For renovation work where an existing structure is being insured, the homeowner is usually the lead insured because they own the existing structure.

When the policy ends

A contract works policy typically ends at practical completion of the project. After practical completion the homeowner's home and contents insurance covers the building. The transition matters because there is a moment around handover where both policies may either both apply or neither apply. Builders and homeowners should confirm the cover-start date for the home policy aligns with the cover-end date for the contract works policy.

Some policies offer a defects liability period extension that continues to cover the builder returning to rectify defects after practical completion, typically for the contractual defects liability period (often 12 months).

Why builders hold the policy

Two pressures drive the requirement to hold contract works insurance.

Standard residential contracts (HIA and Master Builders NSW forms) contractually require the builder to hold contract works insurance for the contract value plus a margin (typically 10 to 20 per cent) for the duration of the project. The builder must provide a certificate of currency to the owner before work starts.

Financiers of new residential construction (banks and other lenders providing construction loans) usually require evidence of current contract works insurance before they release each progress payment. A lapsed policy mid-build can hold up progress payments and create cashflow problems.

Sum insured

The sum insured should equal the full contract price plus an allowance for variations, professional fees (typically 10 per cent), debris removal (typically 10 per cent) and escalation. Underinsurance is a common claims problem: where the sum insured is less than the actual replacement value, most policies apply an averaging clause that reduces the claim payment proportionally.

For a $500,000 fixed-price new build, a sum insured of $625,000 (contract plus 25 per cent) is a defensible starting point. The exact margin depends on the policy and the specific risks.

Practical implications

Three habits keep contract works insurance clean.

Confirm the policy is in place before any work or deposit. The contract works policy must run from the date of site possession, not the date of contract signing. Building on a site that is not covered by the policy is uninsured exposure.

Increase the sum insured as variations land. A signed variation that adds $20,000 to the contract price needs to be reflected in the contract works sum insured. Variation-driven underinsurance is the most common cause of partial claim payments.

Maintain the certificate of currency in the project record and on the builder's portal. Homeowners increasingly request it before each progress payment. Financiers always do.

Related entries

HBCF (covered in the hbcf-insurance-requirements entry) covers consumer protection for builder default and incomplete or defective work. Public liability insurance for residential builders (separate entry to follow) covers third-party personal injury and property damage claims. Workers compensation (workers-compensation-residential-builders entry) covers workers injured on site. The four policies typically apply to a residential builder at the same time but cover separate, complementary risks.