Contract works insurance is designed to protect projects while they are under construction. While most builders understand the need for this cover, a common issue arises in how the sum insured is calculated. Confusion between contract value and declared sums insured can lead to underinsurance, which may only become apparent at claim time.

The sum insured should reflect the full value at risk during construction. This is not always limited to the contract price alone. Depending on the project, it may also include materials supplied by the principal, variations, labour costs and other associated expenses required to complete the works. If these elements are not properly considered, the declared value may fall short of the actual exposure.

Aligning contract value and cover is important because:

• The sum insured should reflect the total cost to reinstate the project
• Variations and material cost increases can change exposure during the job
• Understating value can lead to reduced claim settlements
• Insurers assess claims based on declared values at the time of loss

Under-declaring project value is one of the most common causes of underinsurance. A builder may initially insure a project based on the original contract price, but as the job progresses, variations, upgrades or cost increases are not always reflected in the policy. If a significant loss occurs, the insurer may apply an underinsurance clause, reducing the payout proportionately.

For example, if a project is insured for less than its actual value, the claim may only be paid in proportion to the declared amount. This can result in a shortfall that needs to be funded by the builder, even though insurance was in place.

The issue is not always obvious during the project lifecycle. It often only becomes clear when a claim is made and the declared sum insured is compared against the true value of the works. At that point, options are limited.

Before starting a new job, it is important to review your contract works cover in detail. This ensures that the policy aligns with the actual scope, value and structure of the project.

Key areas to review include:

• Confirming the full project value, including materials and variations
• Checking that sums insured reflect current construction costs
• Ensuring policy limits are appropriate for the size of the project
• Reviewing contract requirements relating to insurance

Taking the time to review these details at the beginning of a project can prevent unexpected gaps later. It also ensures that your policy responds as intended if an incident occurs.

Final Thoughts

Contract works insurance is only as effective as the values declared within it. Confusion between contract value and sum insured can lead to underinsurance and reduced claim outcomes. Reviewing your cover before each project ensures that your policy reflects the true value at risk and provides greater confidence throughout the build.