What Is Contract Works Insurance and What Does It Cover?

Contract works insurance is a specialized form of property insurance designed to protect construction projects from unforeseen physical loss or damage during the construction period. This coverage safeguards the financial investment in a building or structure while it is actively being built or renovated. It addresses risks inherent to construction sites, where structures are vulnerable to various incidents before completion and handover.

Core Coverage of Contract Works Insurance

Contract works insurance fundamentally covers physical damage to the actual building or structure undergoing construction. This protection extends to the physical components of the project, including the new construction itself, any materials delivered to the site for incorporation, and temporary works such as scaffolding or formwork.

The policy typically covers a broad range of perils that could cause damage during the construction phase. Common covered events include fire, theft of materials, malicious damage, and natural disasters such as storms, floods, or cyclones. Accidental damage, including structural collapse or impact damage, is also a standard inclusion within this coverage.

Coverage begins when materials are delivered to the construction site or when construction activity commences, and continues throughout construction. It concludes upon the practical completion of the project, its handover to the owner, or when the structure is occupied. Some policies may also extend to cover a maintenance period after completion for latent defects.

Parties Who Need Contract Works Insurance

Main contractors and builders are responsible for arranging contract works insurance, as they bear the primary risk for the physical assets of the project during construction. This responsibility often arises from contractual obligations with the property owner or developer. This insurance mitigates the financial impact of damage to the project under their control.

Property owners or developers may also arrange this insurance, particularly for smaller projects or if they are self-managing construction. Their direct involvement in the project’s financial risk makes securing this coverage a prudent decision to protect their investment.

Subcontractors often find their work covered under the main contractor’s policy, but they may need to confirm the extent of this coverage for their specific portion of the work. In some instances, depending on their contractual agreements or the scope of their involvement, subcontractors might opt for their own specific coverage.

Lenders and financial institutions mandate contract works insurance as a condition for providing financing for construction projects. This requirement protects their significant investment in the project by ensuring that the collateral—the building under construction—is insured against physical loss or damage.

Common Inclusions and Exclusions

Contract works insurance policies are comprehensive, often operating on an “all-risk” basis, covering any peril not specifically excluded. Beyond the common perils like fire, theft, and natural disasters, detailed inclusions often extend to specific construction-related incidents. These may include damage from collapse, subsidence, or impact from vehicles or falling objects. Water damage, such as from burst pipes or sudden and accidental escape of water, is also typically covered. The policy can also extend to cover professional fees incurred for architects and engineers to repair insured damage, and debris removal costs following a covered loss.

Despite the broad coverage, several common exclusions exist within contract works policies. Losses stemming from defective design, faulty materials, or poor workmanship are generally not covered, as these are typically addressed by professional indemnity insurance or specific warranties. However, some policies may cover “resultant damage,” which is damage caused by a defect to otherwise properly executed works. Wear and tear, gradual deterioration, or losses discovered only during inventory are also standard exclusions.

Furthermore, policies exclude losses due to acts of war, terrorism, nuclear risks, and willful misconduct or gross negligence by the insured. Consequential losses, such as loss of profit due to construction delays, are generally excluded unless specifically added as an extension. Damage to existing structures on a site, if they are not part of the contract works, is excluded, requiring separate property insurance. Optional extensions can cover some of these exclusions, such as advanced loss of profits, professional fees, or debris removal costs.

Types of Contract Works Policies

Contract works insurance policies are structured in two common ways to suit varying project needs and contractor operations. One common type is the Single Project Policy, covering one specific construction project from its commencement to its completion. This policy is particularly suitable for individual, large-scale, or complex projects that have a defined scope and timeline. It offers tailored coverage limits and terms specific to the unique risks of that single endeavor, ensuring comprehensive protection for the duration of the build.

The alternative is an Annual, or Open, Policy, covering all construction projects undertaken by a contractor within a 12-month period, subject to limits per project. It suits contractors with a continuous flow of smaller to medium-sized projects. It offers administrative convenience by eliminating the need for separate policies for each new job. While an annual policy can simplify insurance management for active builders, larger or exceptionally complex projects may still warrant a separate single project policy due to their unique risk profiles and higher value.