In this Q&A we talk with Insurance industry expert Mark Adams from Allrisk Insurance. You’re in for a real treat as Mark gives a complete low-down on Owner Builder Insurance.
Trust us, you’ll be very well-informed by the end.
Is there a difference between insurance for a new build versus insurance for a renovation/extension?
A new build:
The new build is fairly straightforward as far as insurance goes. There’s Public Liability risk that is arguably the most important part and the one that Councils and banks tend to check on. Full Material Cover for the house up to completion and the building materials. That’s pretty much the main insurance.
For a renovation, it’s a bit more complicated because it depends on how good or bad the existing home insurance is.
If you’re in the same boat as 99% of people you’ll have a home policy that has exclusions against any loss or damage to the existing house if it arises from construction work.
That’s one problem to solve.
Second, in some cases the project could be of a type, value or scope that actually completely invalidates the home insurance.
We need to target the insurance to deal with those separate problems (exclusion and invalidation).
The first one, exclusion, is straightforward. We make sure that our quote includes optional cover for the existing structures for damage directly arising from the project. That fills that gap.
If the home insurance has been invalidated, then we would recommend the upgraded level of cover on existing structures to fully comprehensive to cover the project for unrelated items like storm and bush fire that you’d normally be getting from your home insurance.
So when doing a renovation/extension as an Owner Builder, it’s important to check your existing home insurance policy?
Yes. In fact, you’re required to which a lot of people don’t realise.
The home insurance, along with every other insurance policy in Australia, has what’s called a Duty of Disclosure where if your risks have changed substantially you have to let your Insurer know.
In doing so, that’s when people would normally find out what the gaps in Insurance are, but if you end up speaking to a junior person in a Call Centre you’ll need to be direct with your questions.
For example, you should ask – here’s what I’m doing, here’s the value of what I’m doing, will you be covering me if this damages my house? And, will my policy even continue?
That way if the person doesn’t know the answer they’ll check with a supervisor or check your policy wording on your behalf.
Are Public Liability and Full Material Cover insurances compulsory?
There’s no insurance that’s compulsory by law or by any legislation other than Home Warranty insurance, when that does apply, and that never applies to an Owner Builder during a project. It’s something that applies in some States when selling the property.
However, the word ‘required’ could still apply to the Public Liability part. The Public Liability is often required by Councils. Council wants to know if you’ve arranged Public Liability but they don’t always actively follow you up.
The Material Cover part could also be required if you’re borrowing money for the project because you’re bank will want to know that you’ve got that material cover.
Are Public Liability and Full Material Cover separate insurances?
Public Liability and Full Material Cover are on the one policy and can’t be separated. You can’t get one without the other. They are two separate sections on one policy. One section is called Contract Works (Material Cover) and the other is Public Liability or Legal Liability (terms are interchangeable).
Are there other insurances that Allrisk recommend for Owner Builders?
There are other insurances but the Public Liability and Contract Works is very strongly recommended.
Let’s say you’ve got a Council that’s not actively following up the insurances and you’re not borrowing money so your bank is not following you up, I’d still call this absolutely necessary even if not legally compulsory because you’ve got to remember you’re going to be a licensed builder in charge of a construction project with all of the exact same risks as a registered builder.
If you asked a registered builder – would you go and do your job without liability and material cover they’d say you’d have to be crazy.
So yes, required in the sense of covering a very serious insurable risk.
There are other risks you can insure for that apply to some projects and not others. Workers Compensation is an interesting one. We recommend it in some states and not others and only for some Owner Builders.
The Workers Comp exposure Owner Builders generally do have is primarily to sole traders.
The common question we get is – why can’t I just check that the contractors have their own insurance? The answer is, you absolutely can but you have to understand when it’s possible and not possible.
A Pty Ltd contractor can and does cover both themselves and their workers for workers comp. Sole trader contractors can only cover their workers but cannot in any way cover themselves for workers comp.
A sole trader when they’re injured often rely on making a liability claim against you – saying you did something wrong OR they make a claim on their own income protection type insurance. But that’s not always possible, and its important to note that they can also make a Workers Comp claim against you. The claim against you may or may not be successful though.
WorkCover would look at it at the time of the claim if that happens and they would either deny the claim or classify them as a deemed worker.
It’s a deemed worker that is the biggest exposure for Owner Builders.
A deemed worker is a contractor who fits any of the following criteria (all or some). It’s a guide only that WorkCover (icare in NSW) use to make an assessment – was the contractor paid on an hourly rate; were they given instructions by you as to how to do the job; were they providing their own materials or did you provide them, and other similar questions.
There is no firm rule as to which of those is more important or how they make the decision. If they classify them as a deemed worker that means they are successful with their claim. There’s a risk of a sole trader making a workers comp claim against you and there’s some risk of that claim being successful.
The workers comp policy that you’d take out would be a Minimum Premium Safety Net Policy to cover against that possibility, along with the legal costs that might involved in defending against the claim.
Does that mean it’s important for an OB to understand if their contractors are sole traders or Pty Ltd?
If you only engage Pty Ltd contractors then you could feel confident that all you have to do is check they have a workers comp policy then you would know that you have no exposure.
There’s a small amount of exposure when hiring a Pty Ltd and that’s if they don’t have the policy they’re meant to. If a Pty Ltd contractor hasn’t taken out the Workers Comp that by law he should have and his worker gets injured, the injured worker can claim against you.
Most Owner Builders could safely assume some contractors will be sole traders and therefore will have some exposure.
Workers Compensation is a complex area and differs by state. It’s best to get expert advice for this type of insurance.
If Workers Compensation differs by state, does Public Liability as well?
No. The only other insurance that varies by state is Home Warranty insurance as to whether you need to get it when selling the property. There are states where it doesn’t apply to Owner Builders at all. It’s not something to worry about at the commencement of the project. It only needs to be considered if selling.
The general rule of thumb and in a state where it does apply, it’s about 6 years after the completion of the project. The government keeps changing the rules so it’s always best to speak with a specialised broker. For example, as of January 2017, in NSW, Home Warranty Insurance was no longer required.
Is it only the Workers Compensation Insurance that Owner Builders should check with their tradespeople?
Tradies should absolutely have Public Liability Insurance and if they’re Pty Ltd they should also have Workers Comp.
If they’re a sole trader and have workers, they should have workers comp, however if you hire a sole trader who is a one-man band, they can’t have workers comp so it’s not necessary to ask.
Should Owner Builders go so far as to ask for evidence of their tradespeople insurances?
Absolutely. Allrisk also insures a lot of tradies as well as builders and Owner Builders. Tradies regularly ask for certificates of insurance to show to someone before going on site. It’s certainly not unusual, it’s not pushy – it’s smart.
If a tradesperson doesn’t show evidence is that a red flag to a bull?
If they’re not willing to provide a Certification of Insurance or a Certificate of Currency (as it’s sometimes called) which shows their insurance is paid and up-to-date, then personally, I wouldn’t allow them onsite.
We had an instance only recently where an OB neglected to check the contractors Insurance and it’s now a big problem.
Managing costs is a big focus for OBs, what’s an average cost of insurance they should factor into their budget?
It varies depending on the value of the project. People doing a renovation/extension tend to assume the insurance is going to be expensive therefore they go without, particularly if no one is prompting them (like Council or bank). If they don’t get prompted and it’s a low value project people assume it’s not worth the effort paying for insurance and they go uninsured. But the cost is not prohibitive, and it’s vital to have it.
Pricing is affected by a ‘minimum premium’ (of around $1,000) so smaller projects don’t get quite the same ‘value for money’ on the insurance pricing.
It’s important to remember that the smaller the project however, the larger the margin a registered builder would normally add. The cost of insurance is one of the reasons why that is the case.
People try to avoid the insurance if the project value is small, especially if the cost seems out of proportion with the project value, or with the short time the project will run for. They have a tendency to think that “low project value” or “short duration of works” means that the risk is also small, but that’s just not true.
The big risk is the public liability. If someone gets seriously or permanently injured which can happen even on a small project, you’re talking potentially millions of dollars claim that you’ve got uninsured.
Don’t dismiss insurance even if you’re doing a small project!
What are some of the most common claims you see?
A class of insurance we should cover is Volunteers cover. Owner Builders, if they’re going to be working on site themselves, will then often have friends and family offer to help.
Therefore there could be people working on the site that are not being paid and therefore are called volunteers working on the project.
There’s a policy designed for that and it’s called Group Income Protection Insurance and/or (depending on level of cover taken out) Medical Expenses Cover. Broadly referred to as Voluntary Workers Insurance.
There is an option for this cover to include an owner builder doing work however if an Owner Builder is only managing the project and not doing any of the work, then it’s not necessary.
It’s one of the ones we see common claims on.
The other common claim we see is storm damage. Not always because the storms are severe but because the roof is being opened up on a renovation/extension project or even with a new house that’s not quite to lock-up stage, the prevention against storm damage can be difficult.
Potentially people will have tarps up however even the best tarping can fail.
The larger claims that are more common are injuries to a 3rd party. For example, wind picking up a sheet of metal and blowing on to a neighbouring property and injuring a person. Damage to a neighbours car and/or house from movement of the ground (cracking neighbours property).
When it comes to getting Insurances, what fine print do OBs need to be aware of or know about?
The biggest trap is to be aware of how limited an existing home insurance policy is in the event of renovating/extending. That tends to catch people by surprise.
Owner Builder Insurance is a very niche market offered by specialist providers. The major insurers don’t offer Owner Builder Insurance.
Once you find an Owner Builder insurance specialist, it’s important to understand the exclusions. For example, if you’re covered for vibration and earth movement damage to neighbours property.
Understanding the benefits of a policy is important and understanding the exclusions is also important.
What’s different about Allrisk?
95% of what we do is Owner Builders insurance and we’ve been specialising in that for over 10 years. Allrisk is one the largest providers and we have the best range of products.
The product is very good, the prices are very good and we pride ourselves on our expert advice.
We’re there for people when they take out insurance and we’re there to assist at every point of a claim should it arise.
So, are you as well informed as we anticipated? Such a valuable Q&A and a huge thanks to Mark Adams for the depth of information. It's brilliant!
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