Examples of potential insurance claims against builders and how insurance can help

The past 25 years of rising house prices coupled with the expense of moving home has seen many people stay where they are and undertake home improvements and extensions instead.

While this trend has created more work for small domestic building companies, it has also fuelled a rise in insurance claims against builders (1).

With many home improvement builds, money has been paid up-front to the builder. This is typically to cover materials and labour to get a project off the ground. While this can be part of a staged payment plan to spread the cost of the build, it can also leave the homeowner in a tricky situation if something goes wrong. Does the client continue with an unsatisfactory builder, or do they incur extra costs and delays trying to find a replacement?

What can be more concerning for a homeowner, is that some issues may not arise until a few years after building work has been completed.

If a homeowner encounters a problem, then a builder can become subject to a claim if the claim arises within six years of the work having been completed.

For the builder this could cause a serious financial problem if they are not insured.

In this article, we look at some example scenarios of claims that could arise against builders and highlight how business insurance could help.

Example scenarios of claims that could arise against builders

Misinterpretation of designs or plans

You are provided with designs by an architect, but you misinterpret the designs which results in the build either being too big or too small. Both of which are going to cost the client extra money to rectify the problem.

Key issues: Alleged negligence.

Insurance: No matter how careful you are, mistakes can still be made. Therefore, it is important to carry professional indemnity insurance which will cover you if a claim of negligent work is made against you or if you make a significant error in your work, both of which are alleged to have caused your client a financial loss, such as extra costs added to the build.

Non-adherence of building regulations

Stories of extensions and new builds being completed without planning permission are common. Whilst retrospective planning permission can be applied for, it is not always granted, which can mean a build is ordered to be dismantled.

This is a simple example of how a building regulation can be breached and how it could cause a client a significant monetary loss.

Other issues related to building regulations can include temporary construction permits expiring before a job is completed, and the withdrawal of right of way access, which can cause plans to be withdrawn.

Key issues: Alleged negligence.

Insurance: There are a lot of potential trip hazards with building regulations, so it is understandable that builders can sometimes get caught out. However, even if an occurrence of a building regulations violation is a genuine mistake, it can still cause the client a monetary loss which can result in a claim. Professional indemnity insurance is a vital form of cover in this instance to cover the costs of defending a claim.

Using incorrect materials

A builder will typically be provided with designs that have been drafted by an architect, which in some cases can stipulate the materials that should be used.

If a builder uses incorrect materials – to save costs and increase the profit margin, or if the specified materials are unavailable – and as a result there is a problem with the build. Then the builder could be subject to a negligence claim. If the problem has also caused an accident – for example, if the materials were not strong enough to be load bearing – then the claim could become expensive.

Key issues: Alleged negligence.

Insurance: Use of incorrect materials can be down to lack of availability of the materials specified in the plans. Alternatively, it could be down to a desire to reduce costs, either by the builder or the client, or both. Whatever the reason, if incorrect materials are used and it is later discovered that those materials were not fit for purpose, then that creates an immediate and potentially costly problem for the client.

If the client decides to pursue a negligence claim against the builder, then professional indemnity insurance would be required to assist in defending the claim.

Leaving the building site without completing the work

Some extreme types of contractual breach can lead to repudiation, which can be the refusal by the builder to complete the work, which could be due to a disagreement about the project between the builder and the client. Repudiation can even go as far as the complete abandonment of the building site.

However, not completing the work can also be due to an unforeseen circumstance, such as an overcommitment to projects, staff shortages due to illness or injury, cashflow issues, materials supply issues. So, it is important to discuss the situation before pursuing legal action.

Key issues: Alleged negligence and public liability risk.

Insurance: If a client does not want to discuss the situation or has discussed it and still does not see the situation from the builder’s point of view, then they could pursue legal proceedings to recoup any extra costs incurred in sourcing a replacement builder to complete the job. Professional indemnity insurance could help in this situation.

If the builder has left the site, then the site becomes a public safety hazard. This represents a liability risk in which someone could have an accident. If someone does have an accident, then the builder could also be sued for compensation. This would require public liability insurance in order to cover the costs of defending the claim.

Unforeseen delays

External factors that you simply cannot foresee, or control can cause issues to all industries. Rising inflation can cause costs to increase, and with fuel and material costs rising monthly this can increase the cost of a building project from what was originally quoted for. It can also have a knock-on effect and cause supply chain issues, which can cause materials shortages and delays.

Key issues: Alleged negligence.

Insurance: Despite the builder’s best intentions, if there is an unforeseen delay to a building project which is alleged to have caused your client a financial loss, such as extra costs, then the client could pursue the builder for compensation. To defend a claim of this sort the builder would benefit from the protection that professional indemnity insurance provides.

A site visitor has an accident

A building site of any size represents a very real hazard to the public. It could be the client or a member of their family, or it could be a delivery person such as a postal worker, it could be a passer-by or even one of the contractors who has been brought into the job, such as an electrician, joiner, or plumber.

Regardless of who has an accident on the site, the builder is responsible, and could therefore be sued for compensation by the unfortunate individual who is hurt.

Key issues: Public liability risk.

Insurance: The key business insurance policy for most trades professionals is public liability insurance, which has been created to specifically cover insurance claims such as this.

How long is a builder liable for defects?

Defects Liability Period

Builder’s defects liability is the period after the completion of construction work in which the builder is responsible for rectifying any defects in their work because of faulty workmanship, design work, or the materials they have used.

The defects liability period is typically between 12 to 24 months but can vary depending on the terms of the building contract. However, once this 12-month period is completed this does not mean that the builder cannot be sued for defective work (2).

Statutory Liability Period

It is important for a builder to be aware that in the UK, they are responsible for defects for a period of 6 years from the completion of the construction work.

This is in accordance with the Limitation Act 1980. The Act sets out the time limits for bringing legal claims for a breach of contract or negligence, which is known as the “statutory warranty period.” (2)

As such, it is important for a builder to carry their business insurance – without any breaks in cover – for at least 6 years after they have completed the work just in case a claim is made against them.

Insurance: We do not provide cover for defective workmanship, so if a job isn’t up to scratch it will not be covered.

There must be an allegation of negligence in the course of the builder’s professional activities and duties before an indemnity insurance policy will respond.

Sources:

1. https://claimsagainst.co.uk/builder-or-construction-company
2. https://buildsafe.co.uk/how-long-should-a-builders-defects-liability-period-be/

www.mbawa.com/defects-liability/

www.helix-law.co.uk/defect-liability-period-statutory-liability-difference/

www.myhomeextension.co.uk/what-should-i-do-if-builder-refuses-finish-job