Over the past year there have been significant increases in the cost of building materials, most notably timber, steel, and concrete. These rising costs have put considerable pressure on profit margins for many existing building contracts, but builders also need to be aware of how these rising costs interact with their insurance coverage, particularly when taking on higher value jobs.

Annual contract works & liability policies all have a set limit for the maximum contract value and an estimate for the business turnover across the year. These figures are established and agreed each year, and will impact the premium payable and excess for your policy. While exceeding the turnover estimate only leads to an additional insurance premium to pay at the end of the year, the set limit for your maximum contract value is a firm restriction, that if exceeded, can have serious implications, but insurers differ considerably in their response. 

Under many contract works & liability policies projects exceeding the set maximum project value are (often repeatedly) noted as uninsured projects in the insurer policy wording.  Critically, not having any cover at all for your largest project is a substantial risk to your business. Other construction policies will still provide cover up to the set limit but will not exceed that limit.

Cost escalations caused by supply and labour costs during the construction of a contract were historically managed through an escalation allowance within a policy. This additional benefit in most good policy wordings allows for a 10% or 15% escalation on the original contract price due to unforeseen circumstances. Unfortunately, in this inflationary environment, the 10% or 15% on offer is not enough to provide the broad protection that some contractors need.  Furthermore, if the initial contract is signed at a value that exceeds the policy agreed limit, this will often not be deemed to be an escalation – and may not provide any flexibility at all depending on the insurer.

As an example – under their annual contract works policy a builder has set their maximum contract value at $1M. While only undertaking a project similar in size and finish as to what they’ve done before, due to escalations in labour and materials a new project is commenced with a contract value of $1.25m. In the event of a claim, many construction insurance policies could deny cover altogether as the project exceeds the insurer agreed maximum project value. The alternate insurer approach that better protects your business is to have a policy that still provides you with cover up to the $1M set limit. While a better policy provides $1M cover compared to the complete exclusion under another policy, the obvious preferred solution is to recognise that this limit is strict, and to update your policy prior to signing contracts above the current limit. While there would be legal avenues to challenge any claim denied on this basis alone, referencing the Insurance Contracts Act, by simply being aware of your set limits you can avoid a potentially long and protracted legal dispute.

In setting your annual maximum project value limit each year, we would generally encourage builders to add a buffer of 10-20% or more to help avoid these types of situations. Setting the limit excessively high can increase your premium and excess, so the limit needs to be realistic to avoid increased insurance costs, but through recognising the limit as a firm restriction, builders can protect their business and increase when taking on higher value projects. 

Note that the limits on your contract works & liability policy may be different from what is found on your Domestic Building Insurance (Home Warranty) letter of eligibility. When increasing one, it’s good practice to remember to increase the other.

Master Builders Insurance Brokers (MBIB) is a specialist construction insurance broker. For any questions on this article or to better understand how MBIB can better protect your business please contact us on (03) 9411 4555 or visit Master Builders Insurance Brokers (MBIB) website.