The simple answer to this question, with a not-so-simple explanation is, 'it depends'. That’s not very helpful, you might think, but such is the nature of mistakes. There are, of course, unlimited ways that someone could stuff up, and not every scenario can be insured.
This article outlines some standard scenarios to help you determine what can be insured and what can’t. And, if it can’t be insured, how you can minimise your chances (and cost) of making a mistake.
Installation errors
If plans and specifications are correct, yet the builder makes a mistake in the interpretation of and execution of these plans and specs, they are unlikely to be insured. Up until recently, there was some level of cover available for this, but it has now been withdrawn from the market by the last remaining insurer providing it. (Builtin continues to look for a replacement.)
With the upcoming changes to H1 and requirements for improved thermal and energy efficiency in buildings, mistakes in the specification of these components that renders the building non-compliant could result in a claim of negligence.
The designer/specifier would generally be insured under professional indemnity insurance. However, if the specification is correct but the contractor mistakenly installs the wrong insulation or windows or pours a slab with the wrong R-value, the contractor would not be insured.
Damage to, or loss of, physical property - including theft
This is the most common area of insurance cover. If you accidentally damage property, or property is stolen there is a good chance it’s insured (providing you have the right policies in place).
This generally covers:
Buildings
Vehicles
Materials and stock
Tools and equipment
The contract works being constructed
Other people’s property
Some common types of damage that aren’t insurable are:
External water penetration to a building
Gradual damage
Fire - if caused by hot work without proper safety precautions
Damage to underground services - if due diligence is not undertaken to identify the location of such services
Typical common sense risk management applies in these situations:
- Sensible security measures
- Good training and processes
- Taking precautions in case of bad weather
- Undertaking regular risk assessments
Faulty Workmanship
This a complicated area. Whether or not something can be covered depends on several factors.
Generally:
Faulty workmanship can only be insured if this causes damage to someone else’s existing property.
It is not covered if the damage is caused to your own property or a house you are currently building.
It may be covered if it damages other property owned by your client, or if the damage happens after you’ve completed work.
There are some exceptions, however, and a detailed examination of the circumstances is often required before a decision can be made on whether an event can or cannot be covered. As with general damage to property, external water penetration to a building is excluded.
Avoiding these issues is all about having well trained, experienced staff and subbies and maintaining clear communication and processes on site.
A walk through before the job with a ‘what could go wrong here?’ mindset can help identify potential issues. Similarly, so can having ‘a toolbox talk’ with all people involved.
Errors and omissions in design, engineering specifications, land and quantity surveys
If you are responsible for performing or co-ordinating professional services for customers, you may be liable for these errors. That includes design and build companies, as well as builders who contract to perform these services but sub-contract out the work. They remain liable for the actions of their sub-contractors, such as a site surveyor, for example.
Such design, engineering and survey mistakes are generally insurable under professional indemnity policy
Examples of mistakes that are unlikely to be covered are:
Taking the wrong measurements for joinery
Faulty products (this is a warranty issue that would go back to the manufacturer)
Substituting materials without sign-off
Often these mistakes happen because the supervision or project management on site is inadequate. A good workplace culture that values attention to detail is key.
Energy efficiency assessors and thermal (blower door) testing
An increasing move towards energy efficient buildings, and regulations such as the changes to H1 moving compliance, means more requirements for testing and assessment of thermal and energy efficiency. Professionals providing this service can be liable if they make mistakes in their work. Professional indemnity insurance is available (and often a requirement) for this activity.
Builtin has introduced New Zealand’s first policy for professional blower door testers and energy raters, which is very affordable, compared to general market offerings.
Negligent project management
If you provide project management services for a fee to other people, then alleged negligence in the performance of these services can also be insured. You can’t generally insure for project managing your own building contracts, even if you sub out the work to others and your only role is to manage the job.
Unintentional breaches of the law
This may involve breaches of the Building Act, Health & Safety at Work Act, Fair Trading Act, Resource Management Act and others. These acts incur heavy fines for breaches. However, these can be insured, along with legal defence costs. The exception is fines under HSWA, which can’t be legally insured, however legal defence costs and reparations can be covered.
A detailed understanding of the project parameters and your legal responsibilities as a business owner and building practitioner will avoid many of the most common pitfalls. Joining a trade association or becoming a member of an organisation such as Building Hub is a good way to keep up with these obligations. They also provide supporting documentation and tools to assist compliance.
Employment matters
Business owners or managers will know this can be one of the most difficult aspects of running a business. There are many legal obligations and compliance requirements, and failure to follow these can result in significant costs. Employment disputes, as well as illness or injury to employees that is not covered by ACC, can be insured.
Good professional advice from an employment specialist, including up-to-date employment contracts, can help you avoid many of these potential issues before they arise.
Management decisions
Mistakes on the job can be costly, but so can those made in the boardroom. You only need to look at Mainzeal and other high profile construction company collapses over recent years to know that poor decisions at the top can have big consequences.
These decisions can be questioned and those making them can be held liable for the cost of bad ones. If a company goes bust, the liquidator can seek to recover losses from directors if they have breached obligations under the Companies Act.
Trustees also have a duty of care and can be held responsible for decisions that affect returns for beneficiaries. Directors also have increased obligations under the Construction Contracts Act to hold retentions money properly. Failure to do so can result in severe penalties.
These obligations can generally be insured, although to cover insolvency risk, a healthy set of financial accounts is usually required by the insurer each year.
In a Nutshell
Mistakes, errors, omissions and negligence can be insured in many cases, but not all. It pays to have an understanding of where your risk exists and have good processes, systems and training to minimise the likelihood of mistakes happening. A good risk assessment and management plan can save you thousands of dollars in costly errors, as can a tailored insurance programme.
Builtin are New Zealand’s Trade Insurance Experts
For more information visit builtininsurance.co.nz
or contact Ben Rickard, Construction Risk Adviser and Director | ben@builtin.co.nz | 0800 BUILTIN
Disclosure: The information presented in this article is general in nature and not intended to be financial advice for individual situations. You should speak to an expert about your specific circumstances and needs.
