Owner building can be a greatly rewarding activity. Remember to think of yourself as a 'builder,' and to approach all matters involving your project with that mind-set, and the risks can be managed, so you can also retain some peace of mind and sanity.
When insurance is needed
A builder, regardless of whether they are a registered builder or an owner builder, faces very specific risks and responsibilities that need to be managed, and that means also having the right insurance.
If you're an owner builder you need owner builder insurance; there are really no exceptions to this rule.
An owner builder license is issued to you as an individual so that you can assume the role of 'builder' for your project, and this requires that you insure correctly.
The obvious risks are those that result in your own material loss or damage, and these are purely a financial risk that to some degree may be manageable without insurance, although that's not possible for most people. The even bigger issue is that of Public Liability exposure. As a builder you will be held responsible for damage caused to anyone else's property and even more importantly, for any injury caused to a third party.
Serious or even permanent injuries can occur on even the smallest projects, which is why your local authority will usually insist that you show evidence that you've arranged owner builder insurance before commencing your project*.
* In Tasmania, you need to arrange the insurance before you will even get project approval!
Your local council will always advise that you must be insured properly, with a particular focus on Public Liability.
Remember, the smaller the project the smaller the cost of the insurance, so there is no reason to use the size of your project as a potential reason to put the thought aside.
When should you start getting advice
When preparing to be an owner builder you will find yourself looking into various expenses and getting quotations. You may even go through this activity before you decide if becoming an owner builder is right for you.
Get some advice on insurance and a rough quotation at this stage. The quote will normally only be valid for 30 days but when you do need to arrange cover your advisor can update your quote with the details already used. This will save you time later and allow you to include the insurance cost into your budget.
Remember that the insurance will be covering you for 'replacement value', so this is not what the project is expected to cost you but what it would cost the insurer to pay for the same project to be done again by a registered builder. Use a rough figure at this stage if you are unsure.
When to get a firm quote
Once you are 30 days or less from expecting to commence work on your project, contact your insurance advisor again to update the quote. By this stage you may also need to provide the local council with evidence that you've arranged insurance, so requesting that cover be arranged now will allow you to provide this evidence.
When to start cover
If you've not already requested the cover to be arranged at the quote stage, be absolutely sure to arrange cover prior to commencing work on the project. If you neglect to do so, the insurance will become more expensive, and you will be uninsured for any losses (injury liability in particular) between the time that you start works and the time that you then arrange the insurance.
Why owner builders need more than just 'workers compensation' insurance.
Planning an owner builder project is an all-consuming process. It's exciting and sometimes even a little scary. Owner builders can find themselves putting all their energy into planning for the building process and sometimes forget one of the absolute basics which should be attended to before starting: insurance. Some owner builders end up seeking insurance part-way through the project (which can be difficult or more expensive to obtain), while others get caught up in the excitement and don't spot the oversight at all. In doing so they not only leave themselves dangerously exposed but can be in breach of legal and/or statutory requirements.
Other owner builders are well prepared, having considered the risks, and aware of the need to insure. But here's where prior experience can lead people astray. Before embarking on their first construction project most people are familiar with straightforward insurance: you have a house - you get house insurance, you have a car... Well, you can see where this example is going. But construction is not so simple.
When considering the risks involved with an owner builder project most people realise that the insurance should cover the building and the building materials against fire, theft, storm, vandalism, etc. during the course of the project. This insurance is called 'Contract Works' and is essential.
The second realisation is that you'll need some insurance in case someone gets injured on the site. This is the complex part and it is where the owner builder can potentially make some incorrect assumptions.
What claims can arise out of someone being injured?
The biggest source of confusion is the difference between points 1 and 2. It is commonly assumed that if someone is injured on a work site that they will automatically lodge a workers compensation claim. However this is not always the case.
1. Workers Compensation
In order for the injured party to successfully claim workers compensation from you they need to:
- have been injured while working on your project, and
- qualify as a 'deemed worker' as defined under the relevant state or territory's workers compensation legislation.
Since qualifying as a deemed worker can only be certain one way or the other after the claim is made, there is still a strong likelihood of this type of claim even where it is ultimately unsuccessful. In these cases having had workers compensation insurance will have removed the onus on you personally to defend the claim, along with the related legal expenses in doing so.
Public liability claims can arise out of damage to someone else's property or an injury to a third party. For the purpose of this article we'll only be discussing the latter; however it's important to note that if you have a public liability policy in place you'll be covered for both.
Injury-related public liability claims arise when, for whatever reason, the injured party believes that you are responsible for their injury by way of negligence. Since an owner builder is effectively in charge of all activities undertaken on the construction site, in addition to being responsible for ensuring the safety of the site, this can often make you somewhat of an easy target. Having said that, the onus is then on the claimant to prove their case against you, and they may or may not be successful in doing so.
For this reason the claimant (if they are also a worker) may even attempt to claim workers compensation as their first option.
A public liability claim may then be made if they are unsuccessful in getting workers compensation, or if they obtain a workers compensation payment but wish to claim against you for amounts above and beyond limitations within the workers compensation system.
If the injured party is definitely not a worker (for example a visitor, whether invited or not), then there will be no such confusion. The claim will always be a public liability claim.
Voluntary Workers / Group Personal Accident
If you, your spouse or friends ('volunteer workers') are intending to be involved in the physical labouring on your project without receiving payment, you may wish to take out personal accident insurance. This is important to consider since you will generally not be able to claim under either workers compensation or public liability for your own injury.
This insurance can be obtained either individually or as a group policy. You may already have an income protection or a personal accident policy in place and these may be suitable (ask your broker). If you don't already have a policy of this type, or if you expect to have volunteer workers, then a group personal accident policy may be the most suitable option.
This type of policy generally covers the owner builder and declared spouse while performing work at the project site, and any other person carrying out work on the same site who does so without being paid. Contact your owner builder insurance advisor/broker for further details.
A group personal accident policy applicable to you, your spouse and friends/family who are not being paid, is called ‘Voluntary Workers’ insurance and will usually be provided in your quote as an option.
When to take out workers compensation cover
In each state and territory of Australia, workers compensation legislation provides owner builders broadly with the following advice:
'Homeowners who are building their own homes should take out a workers compensation insurance policy to make sure they are fully covered. Any contractors engaged by an owner builder may be deemed to be a worker of that owner builder.'
While the wording of this advice varies slightly from state to state the message remains the same; owner builders need to take out a workers compensation policy.
Here's a more detailed explanation:
If the local government body who issues planning permits requires you to have a workers compensation policy as part of documents submitted to Council, you will need to have a workers compensation policy in force for the duration of the project.
If a policy is not required as above, and if you are in NSW or Vic you may in some cases be exempt from taking out a workers compensation policy if the 'total value' (not just 'per worker') attributable to labour is less than $7,500.
From the total estimated cost of the project, deduct the cost of materials.
Deductions can also be made for any contractor who is incorporated (Pty Ltd). If the amount remaining exceeds $7,500, a workers compensation policy should be taken out for the duration of the project.
If the amount attributable to direct labour is less than $7,500, the workers compensation system (as of 30 June 2008) automatically holds the employer covered - if an injured party then succeeds in identifying himself as a deemed worker (and therefore entitled to workers compensation), a policy automatically then comes into force and the 'employer' is asked to pay a nominal premium of $175 and the claim will be processed.
* If you are in any state other than NSW/Vic the $7,500 threshold does not apply. You will have the same requirement to take out a workers compensation policy even on small projects.
If you engage any workers who provide labour only (no materials), even if payments for services are sometimes made in cash, ignore point regarding the threshold mentioned above. In these cases the likelihood of them being shown to be a deemed worker are significantly greater, and you should always obtain a workers compensation policy.
Can't I just confirm that contractors all have their own workers compensation policies?
This is a very common fallacy, perpetuated by word of mouth and even many websites that provide advice like:
'Generally, people carrying on their own business, or trades people, have their own workers compensation insurance. To be sure that you are protected always check that any licensed contractors you hire have their own workers compensation policy.' - MISLEADING!
This advice is why so many people get it wrong. It's not actually that the information is altogether incorrect, but it is ultimately wrong by way of omission. It is vital for you to remember that when you take out a workers compensation insurance policy it does not cover you, it covers your workers. So by having the contractor show you his own insurance policy you only ensure that his workers are covered if they claim against him. It does nothing to change your potential responsibility for any injury to the contractor himself, or any other 'deemed worker.' It will not have any impact on your need to obtain a workers compensation policy.
(* The exception to this rule is where you engage incorporated companies (Pty Ltd) to do the work, as discussed earlier. However it is very unlikely that you will be able to use this type of contractor exclusively, so again this tends not to help.)
If all of this has left your head spinning you may get just a little comfort from knowing that you're not alone. The following is all you really need to remember - practically every owner builder has an exposure to potential claims under the workers compensation system. If you are an owner builder you must seek individual advice from an expert who is dealing with owner builder insurance on a daily basis. And you will almost always need to get a workers compensation policy in addition to contract works, public liability (and personal accident if applicable). You'll then have one significant thing less to worry about while you get on with the actual project.