Why You Need Builders’ Insurance if You Work in Construction

You have worked hard to land and plan a construction project. What happens if an event, like a fire, damages the building you’re constructing? It can be very costly to rebuild the structure, resulting in a low or even negative bottom line. That’s why you need tradesmen's insurance, specifically builders’ insurance. 

Dialdirect would like to clarify what builders’ insurance is, how it works, what it covers and doesn’t cover, and why you should consider having it. The information in this blog will answer these questions, freeing your time to focus on your project instead of worrying about contractors’ insurance. 

What is builders’ insurance, and how does it work?

Disasters on a construction site can hit at any time. For example, floods like those in KwaZulu Natal in April 2022 can destroy materials or the structure you’re building. At times like this, builders’ risk insurance will be a welcome relief. This is also why tradesmen need specific types of business insurance.

Builders’ insurance, also called builders’ risk insurance or business contractors’ insurance, is specialised insurance that financially protects a contractor working on a renovation or new construction project. Additionally, it protects against the loss suffered due to damage or loss of construction materials.

It’s not unusual for project owners and main contractors to opt for all-risk builders’ insurance. This insurance covers the loss or damage to a construction or renovation and includes third-party liability.

A contractors’ insurance policy may be required in an agreement between the building owner and the general contractor. This insurance usually forms the basis of a construction site’s risk management strategy. It protects construction projects from damages caused by the following (amongst others):

• Vandalism

• Fire

• Natural disasters such as hail or lightning

• Explosions

• Theft

If you suffer a claimable disaster, a builders’ insurance policy will pay for damages up to the limits in the policy agreement. Payment policies vary from one insurance company to the next: some cover the property’s replacement value, while others pay the actual value of lost or damaged property. Premiums for contractors’ insurance that pay a property's replacement value are more expensive because payouts are larger.

Some builders’ risk insurance policies pay per claimable occurrence. For example, if you have a policy limit of R1.5 million, there may be an R150,000 per occurrence limit. This means that the insurance policy will pay out R150,000 for each successful claim.

As long as the policy is in force and your claims have not totalled R1.5 million, the insurance company will keep paying R150,000 per claim. Once the total claims have added up to R1.5 million, there would be no more coverage, and additional claims would not be paid.

Who needs builders’ insurance cover?

A construction project can involve numerous stakeholders, including electricians, plumbers, bricklayers, engineers, architects, safety officers, the general contractor and the building owner. Whether contractors working on the building project are independent tradesmen or companies themselves, they face business risks.

It’s worthwhile for anyone facing business risks during a construction or renovation project to be covered by building construction insurance. Construction material suppliers or retailers may also face business risks if they sell their materials on credit. For example, the material might be damaged on a construction site and impact the buyer’s ability to pay. 

Builders’ risk insurance becomes invaluable for covering these business risks. You can’t pin your hopes on home contents insurance or buildings insurance because they’re limited in what they cover. For example, home contents insurance covers only personal possessions, like kitchen appliances or furniture. 

You might wonder who pays for builders’ risk insurance since a construction or renovation project involves many contractors as well as the owner of the building. The two main stakeholders are the project owner and the general contractor. They stand to lose the most if any of the abovementioned perils occur during a construction project mishap.

For this reason, it’s usually either the project owner or the general contractor who pays for the builders’ risk insurance. Often, the general contractor and the project owner will agree on who will cover the cost of the contractors’ insurance. 

If you’re a subcontractor on a construction site, ensure you’re named as the insured in the builder’s insurance policy. Otherwise, you might face a severe financial loss if you’re legally liable for property damages during construction. 

What does builders’ insurance cover?

Armed with a builders’ risk policy, you won’t have to worry about financial losses due to unforeseen events. This policy will cover the following:

• Loss or damage due to vandalism. This can set your project back months. For example, a vandal may damage expensive plumbing, necessitating the plumber to redo the work.

• Onsite theft. Theft is a significant issue in South Africa. Construction sites lose about R1 billion annually due to theft each year[1]. Thieves can get away with construction materials and other items, delaying the completion of your project. Builders’ risk insurance will pay out for the loss and help you get back on track to finish your project timeously.

• Loss or damage to temporary structures. It’s not unusual for contractors to hire containers and also erect temporary buildings. These are covered in a builders’ risk insurance policy.

Your policy will clearly spell out everything it covers so that you can have peace of mind. However, builders’ risk insurance doesn’t cover you for all business risks faced during a construction or renovation project. 

For example, it doesn’t cover the following:

• Damage to or loss of work vehicles

• Loss or damage due to faulty workmanship

• Faulty design (which is usually covered under errors and omissions insurance)

• Loss or damage due to war

• Wear and tear

• Loss or damage due to manufacturing defects 

For specific exclusions in your builders’ insurance policy, carefully read the relevant sections of your policy.

Four good reasons why you need builders’ risk insurance 

There are certain benefits to a project owner or a contractor for taking builders’ insurance. Here are four of the most important:

• Protection against unforeseen events that cause loss or damage to the property or construction materials. This insurance will compensate you for fixing the damage or replacing lost items.

• It’s a legal requirement. Some construction or renovation projects may be required by law to cover contractors’ insurance. In some cases, the project financier may require this insurance to protect their loan to the project owner.

• Protection of machinery or equipment against accidental damage or loss. Construction or renovation projects can require the use of expensive machineries such as excavators and cranes. It is expensive to replace or fix such machines if lost or damaged due to unforeseen events. Builders’ insurance will replace or compensate you for fixing them.

• A performance bond will require protection in the form of insurance. The project owner needs financial protection if a contractor doesn’t complete the agreed-upon work. The payout from the insurance will go towards hiring a new contractor to complete the task, saving the project owner from unnecessary stress.

Get a builders’ risk insurance quote from Dialdirect

Whether you’re the building owner or the contractor, you need to be financially protected when undertaking a new construction or renovation project. Building contractors’ insurance will give you peace of mind knowing your project will run to completion.

Simply request a free and no-obligation online contractors’ insurance quote from Dialdirect to start the ball rolling.

Sources:

[1] khplant: Construction site security in South Africa: ways to minimise the risk of equipment theft

  Disclaimer: The information in this article is provided for informational purposes only and should not be construed as financial, legal, or medical advice.