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Insure me if you can

Mark Adams mark@allrisk.com.au
28-10-2016

Insure me if you can!

Getting covered when it seems impossible

While owner builder insurance is becoming easier to obtain, there are still a number of stumbling blocks.

Alternative Building Materials

Houses built with rammed earth, straw bale, mud brick and other alternative materials, are becoming ever more popular. Nowadays not only do the majority of people know about these construction methods, but they could probably even tell you a few of the benefits; energy efficiency, cost advantage, noise reduction, durability, aesthetic appeal, lower environmental impact, etc.

And yet, for all of this, it is still difficult to get insurance for these projects. Why?

It really comes down to how well the insurer understands what you are actually going to be doing, and what risks are involved. In order for insurers to offer you cover they need to have a thorough understanding of the associated risks. If they don't, they generally will not offer you insurance. In some cases, if they understand the risks only moderately well they may offer you insurance but at uncompetitive prices, and often with some major exclusions to limit the cover afforded by the policy. The ideal situation is where they understand the risks well, in which case the insurer will offer you reasonable cover at reasonable rates. That's the theory, but how is it put into practice?

In recent years as the popularity of alternative building materials has increased dramatically, the demand has also significantly increased for insuring these projects. Insurers do tend to eventually respond to these levels of demand, and then react by seeking the degree of knowledge and understanding that will allow them to offer competitive products to meet the demands.

So what's the solution?

Ultimately the issue is supply and demand. The key is not to give up too quickly when one insurer says "no". If you are not asking for the insurance then the perception is that there is not much demand, and therefore the problem never gets resolved.

There are other organisations whose activities are also helping greatly to educate the insurers. All around Australia, companies are springing up who exclusively provide guidance, training and even direct assistance in using alternative building materials. With this kind of help, the risks associated with an alternative build can be reduced significantly.

There are benefits that come out of this in relation to insurance. For starters, if the owner builder is trained in the best methods to do the job, they are taking fewer risks. When insurers become aware that there is method and discipline involved in these projects their perception subsequently improves. The other long-term benefit is that a well-guided or well-trained owner builder ultimately has fewer insurance claims, and over time that brings prices of insurance down.

It's important to point out that while there are specific alternative building method trainers, there are also the general owner builder courses to consider. In some states like NSW, QLD, WA and ACT it is compulsory to do an owner builder course before becoming an owner builder. In the other states these course are however also available, with options both online and in person, so please do consider doing a short course, even if not absolutely required.

(note: The required owner builder courses cover regulatory information, as well as some basic project management, budgeting and scheduling information.)

So how's the availability situation now?

Sadly, availability for construction insurance is still very limited.

There are two major reasons why this may be the case. The first is that insurers, while having a good understanding of the static risks associated with the already constructed buildings, still do not fully understand the risks involved in the actual process of building them.

The second, and more likely, reason is that of potential variability. An example of this would be the availability of tradespersons in your local area who are qualified or experienced in handling these building materials, and the proper techniques for the application of them. The lower the availability of expert assistance, or even advice, the greater the inherent risk. As discussed above, this situation has improved in leaps and bounds in recent years. We are just waiting for the insurers' perception to catch up with the reality.

Whatever the reason, unfortunately most owner builder insurance schemes do still discriminate in one way or another against alternative construction types. But there are insurers willing to offer you good cover at a good price; it's just a matter of coming to the right supplier.

Commenced Projects

Owner builders who seek insurance after already having begun work on their projects are often surprised to find that it's difficult to get cover.

Here are the top four reasons given by owner builders as to why they wait this long before attempting to obtain insurance:

  1. 'We knew that we needed insurance but then we forgot! We got caught up in everything and it just slipped our minds.'
  2. 'I didn't think there was much risk on the site in the early stages so I waited until now to look into getting insurance.'
  3. 'I hadn't thought about it at all, but now our bank says they won't lend us the money to finish the project unless we have insurance.'
  4. 'I'm a builder or tradesman myself and I already have insurance for my business. I've only just found out that my business policy doesn't cover me for this project as it's not a business activity.'

The first reason listed above is the most common, and a perfectly understandable one. Unfortunately this explanation still doesn't help matters if an insurer has a policy of not providing insurance where the project has already started, as some insurers do.

It is common to think about construction insurance in the same way you think of regular house and contents cover, where your primary consideration is material loss or damage. On a construction site, material loss and damage is important but it is always the secondary consideration; the primary concern being public liability. From the very first day you do site preparation work you have a public liability exposure, which is an issue that requires your serious attention. In fact, your local authorities generally stipulate that you must have this insurance, however this is often in the fine print and they may not mention it verbally or follow you up on it. As an owner builder, you are officially in charge of the site for the duration of construction, and any damage to neighbouring properties, or even more importantly an injury to a third party, will almost certainly end up landing squarely in your lap in the form of a public liability claim.

Where the owner builder is also a building professional, a common assumption is that the business insurance will cover the project. While you are on the site as an owner builder, the activities you are undertaking have no link whatsoever to your business (ie not being done under your ABN). So any public liability claim made against you will be against you as the individual who holds the owner builder licence, and not against your business. As such your business insurance would not respond to this claim. Even if you formally invoiced yourself, you would only slightly decrease your exposure; you would effectively become two separate legal entities, the owner builder and the contractor, each performing different tasks and with different responsibilities. The majority of claims will be directed at the builder in charge of the site in any case, not the contractor. There's no substitute for the right advice and the right insurance.

So what can be done about it?

Until recently you would have been required to jump through all sorts of hoops in order to even get a quote on insurance mid-project. Current engineering and progress reports, formal written declarations, increased premiums, higher excesses, delays in placement of cover while all the above information was processed and given 'due consideration'... this is a rough idea of what you'd have been likely to face, assuming you were speaking to one of the insurers willing to look at it at all.

Some insurers will still decline to offer cover, or will require something similar to the above. But things have improved. Even if you are 90% of the way through the project you will now find at least a couple of insurers who are willing to offer cover. 

So it's no big deal if I forget to get insurance, right?

Wrong. Don't let the fact that you will usually be able to get cover at any stage of the project make you become complacent. Firstly, when you do obtain insurance it will generally cost slightly more than if you'd had the policy right from the start (so you may as well have it from the start). More importantly if something does go wrong before you get the cover in place you WILL NOT be covered, even if you take out insurance immediately after.

Ideally, if you haven't started your project yet, get the insurance in place before you commence any work. If you have already started your project get the insurance in place as quickly as you can.

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