Builders indemnity insurance - watchout small developers

Someone i know had recently bad experience in Perth. He was doing a very small townhouses project. He hired a builder for construnction, got mandatory home indemnity insurance. Builder was having cashflow trouble. So he paid to builder's subbies directly but builder went bankrupt later on. He said he is out of pockets by appx 350k or so. He claimed on insurance policy. In the end, insurance company said he cant claim insurance as he is classified as developer and not individual investor. He got lawyer involved. Lawyer told him that if he had separate building contract for each townhouse and separate insurance policies for each dwelling, he would have been covered. But he had only one building contract and one indemnity policy.

This is very important and one to watch for small developers who do projects involving of 6-8 dwellings.

Does anyone know about this kind of situation? Please share your knowledge regarding this.

 

Thanks for sharing, scary indeed

I have separate contract for each dwelling as well as separate invoice for each dwelling

Its a monopoly though and insurance came in at around $8800 in total

 

Was that Builder's indemnity insurance ? Builders are supposed to take it and not you, thats how generally it works. Maybe it was same way in your case too but builder told you cost as its part of overall construnction cost.

I am asking as i am alarmed by 350k loss for my friend and want to find out what other types of insurances are available to small developers like us.

 

yes thats correct but they also put their margin on this why I paid it, no margin.

 

I'm not sure you're getting the whole story on the issue as I've never heard of a claim being denied as a developer.

However the fact that he was out of pocket around $350k is very possible. The compulsory indemnity insurance in WA has a maximum claim of $100k which can be easily used up on a single dwelling. Because of this I will always recommend people get a contract for each dwelling and therefore $100k of insurance money available for each one even though it is more expensive. It is worth it if you ever have to claim.

Thankfully I've only ever had to claim once.

 

You are right, WM. I do not know full storey.

You are also right about 100k limit for mandatory insurance which i came to know about only recently. Other than having separate indemnity insurance for each dwelling, what else we can do as small developer to protect us? Even with 100k cover, its not sufficient. I guess there are some insurance for contract works but i have never used it so do not know how it works but thats the next level of insurance i guess.

 

Contractor's All Risk policy is the builder's insurance over the works - this generally covers damage or destruction to the works in progress.

 

For a single storey triplex it is plenty of coverage to complete each build as it's unlikely that you the remaining part of a contract vs the amount you have paid would be more than $100k each villa. The house I was building where the builder went under was $500k and the cost to get another builder to complete was just over $100k and we negotiated hard to get it down to $100k, could have been a lot more but thankfully I have some good relationships with builders to pull in some favours.

 

You are right, WM. For a single storey tiplex, if developer has individual contract and indemnity insurance policy per unit, 100K is more than what will be needed.

 

What if construnction is in progress and sinkhole opens up at site and it collapses or due to sinkhole adjoining building is in danger or collapses? i remember reading about this kind of scenario in newspaper for a site in Paramatta. Dont know the outcome.

Wondering is there any insurance which will cover it? What happens to liability for incomplete construnction? You would have paid progress payment, builder has built it upto some stage and now it has collapsed. Who will pay for reconstrunction ?

 

Did your associate seek legal advice before appointing the builder? I can't imagine he did as the lawyer surely would have suggested seperate contracts for each dwelling. I realise this doesn't help your associate's situation but it is a valuable point of guidance for others reading the thread.

 

I don't think he seek legal review before engaging builder.

 

is the 100k for insurance per build contract a perth policy or is that the same australia wide?

 

It varies from State to State. In Victoria it is more money I believe but more complex to get to the money.