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Is Your Builder Insured? PDF Print E-mail
Monday, 30 November 2009
ESSENTIAL INSURANCES FOR SMALL TO MEDIUM SIZED BUILDING PROJECTS

When first embarking on the building of a new house, or substantial alterations to an existing property, it is important to ensure that adequate insurance is in place. This essentially comprises Contract Works Insurance which will include Public Liability Insurance.

However, in the first place, you will need to ensure that the building contractor is registered with the National Home Builders Registration Council (NHBRC). The builder pays a registration fee to the NHBRC and must be able to provide a copy of his registration certificate to you upon request as you will be required to submit this to the financial institution providing the bond finance. Similarly, as the developer, you must ensure that the project is also registered with the NHBRC. A fee will be charged for the registration which will normally be payable by the developer.
 
Most financial institutions from whom you may seek bond finance will not advance funds for building unless the Builder’s NHBRC registration details are confirmed and the building project in question is also registered. Your builder must confirm this to you before work commences. In theory, the NHBRC provide you with protection in the event that the building is structurally defective as a result of defective workmanship by the builder during the construction of the building. It should, however, be stated that claims against the NHBRC are mired in red tape and very often do not have a successful outcome for either the developer or the builder.

Contract Works insurance provides the Homebuilder with protection against losses such as the theft of materials from the site, storm damage, flooding during construction, wind damage etc. These are events that will result in the contractor incurring additional costs over and above those that you will be paying him for under your original contract agreement. You must ensure that a policy is in place to cover these costs and that a claim can be made against the insurance company when such an event occurs.

Financial Institutions will not advance any funds in cases where the Contract Works Insurance is not provided either by the Builder or by you as the Developer.
 
Contract Works policies take on a number of forms. The most common is that provided by most recognised or MBA approved builders is the  Annual Contract Works Policy which covers all projects being undertaken by the builder during any given year. It is important that you request a copy of the Policy Schedule or, alternatively, a letter from his insurance broker, to check that the cover is sufficient  for the project that you are contracting with the builder to construct. Pay particular attention to the following:-

  • The Policy Inception Date (ie the date that the cover provided by the policy commences.
  • The Policy End Date. If this is later than the estimated completion date of the project then you will have to ensure that the builder renews the cover at that time.
  • The Policy Excess. Some contractors require you, the client (otherwise referred to as the Employer in most contracts,) to pay the excess when a claim occurs. This should be clarified in the contract document to ensure that the contractor carries this cost.
  • The Single Contract Limit stated in the policy must be adequate to cover the cost of the building contract.

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    If the single contract limit is stated as R 500 000.00 and the contract that you enter into with the builder is R 650 000.00 then the policy will not respond to a claim as the Insurer will deem that the policy is not intended for contracts where the value is greater than R 500 000.00.

Another form of Contract Works cover is the “One-off” policy. This is taken out by either the Contractor or by you, the developer, specifically for the project in question. The Insurer will be provided with details of the building, the estimated construction cost etc and will calculate a premium according to his assessment of the risk. It is very important to establish who will pay the premium for this insurance at the outset as the contractor will seek to recover it from you if this is not clearly stated in the contract agreement.

The “one-off” policy covers the same risks as the annual policy but is more specific to the project being developed. For instance, there may be a risk of collapse of the ground supporting the property adjacent to your site. This risk can be evaluated by the Insurer and cover provided under an extension to the Liability section of the policy called “Removal or Weakening of Lateral Support”. A premium will be calculated for this risk and will need to be paid to the Insurer to ensure that the correct cover is in place when excavation begins.

Both forms of Contract Works policies listed above include a section which provides Public Liability insurance. This is intended, primarily, to cover the risks of damage being caused to Third Party property. In this context, the term “Third Party” describes a person, company  or institution other than the two parties who have entered into the contract for the construction of the project.

The normal forms of agreement used in contracting require the Contractor to indemnify the Employer (developer) against claims that arise from the execution of the contract. Under South African Law the developer of a property assumes a strict or absolute liability for any damage or nuisance caused by the activities on the site. An example of when this policy would be called into effect can be found in the situation where in the course of excavation for a connection from the site to a Municipal service such as a main sewer or water main a Telkom cable is damaged. A claim for the cost of repair will be levied by Telkom which would, in the first instance, be due and payable by the developer. However, in terms of the indemnity provided by the Contractor under the provisions of the contract, the Contractor has agreed to indemnify the developer against this risk. The Public Liability policy  recognises this contractual obligation and will respond to the claim.

The Contractor will be responsible for insuring his own plant, tools and equipment.

In summary, the important insurances that must be arranged are:-

  • The registration of both the contractor and the project with the NHBRC.
  • The provision of Contract Works Insurance, either in the form of an Annual Policy or alternatively a “One-Off” policy.
  • The provision of Support insurance where there is a possibility of property adjacent to the site being affected by the loosening, weakening or removal of support.
  • Public Liability Insurance which is normally included as part of the Contract Works policy.

As a developer it is important to ensure that the insurances offered by the contractor are adequate to cover the full scope of the risks and that the Sum Insured is adequate to cover the full value of the work to be undertaken.

If in doubt, consult with an insurance broker who is registered with the Financial Services Board as a Short Term Insurance Intermediary.

Author: Andrew Brown                                                                         
Nexus Risk Solutions cc
028 840 0365

30 November 2009

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Last Updated ( Monday, 30 November 2009 )
 
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