Contract works insurance is a fundamental risk management tool on construction projects. It is designed to protect against loss or damage to construction works during the construction period.
However, the protection provided by a contract works policy is not unlimited.
Like most insurance products, coverage is defined not only by what the policy includes but also by what it excludes.
Understanding the common exclusions in a contract works policy is essential for contractors, principals and project participants.
The starting point: the insuring clause
Most contract works policies begin with an insuring clause that provides cover for physical loss or damage to the insured works during the construction period. A typical example provides that the insurer will indemnify the insured for damage to the insured works occurring at the contract site during the construction period from any cause not otherwise excluded.
The wording “from any cause not excluded” is significant. It means the policy is generally structured as an “all risks” policy. Instead of listing every event that may be covered, the policy broadly covers damage and then specifies the circumstances where cover will not apply.
For that reason, the exclusions within the policy are particularly important. In reality, the exclusions determine the boundaries of the insurer’s liability, not the insuring clause itself.
Defective work
One of the most significant exclusions in a contract works policy concerns defective work. Policies commonly exclude the cost of rectifying defective workmanship, faulty design or defective materials.
Typical wording provides that the insurer will not be liable for claims relating to the cost of rectifying defective workmanship or faulty design in a building or structure.
However, these exclusions often contain an important qualification. While the policy may exclude the cost of fixing the defect itself, it may still cover damage that results from that defect.
For example, defective workmanship in a structural element may cause other parts of the project to suffer physical damage. In that situation, the policy may exclude the cost of fixing the defective component but still respond to the consequential damage caused by the defect.
This distinction between defects and damage is a central issue in many contract works insurance disputes.
Wear and tear
Another common exclusion in contract works policies relates to ordinary wear and tear.
Insurance is intended to respond to unforeseen and accidental events. Gradual deterioration caused by normal use, environmental exposure or ageing is generally not considered an insurable risk.
For example, deterioration in materials caused by normal weather exposure over time would typically fall within the wear and tear exclusion rather than the scope of insured damage.
This exclusion reinforces the purpose of contract works insurance as protection against sudden and unexpected events rather than routine maintenance issues.
War and terrorism
Contract works policies also commonly exclude damage arising from war, invasion, acts of foreign enemies, or acts of terrorism.
These exclusions reflect the catastrophic nature of such risks and the difficulty insurers face in pricing or underwriting them. As a result, losses caused by war or terrorism are usually excluded unless separate specialist insurance cover is obtained.
Qualifications to causes of damage
Even where a policy broadly covers damage caused by events such as storms or water damage, those causes of damage may themselves be subject to qualifications or limitations.
For example, a policy may exclude damage caused by rainfall in particular circumstances unless the rainfall meets a specified threshold.
In Acciona Infrastructure Australia Pty Ltd v Zurich Australian Insurance Limited, the contractor sought indemnity under a contract works policy after heavy rainfall damaged a road construction project. The insurer relied on a policy clause that excluded damage caused by rain affecting earthworks or pavement materials unless the rainfall event was of a specified severity.
The exclusion provided that cover would only apply if the rainfall event had a minimum return period of 20 years, as measured using Bureau of Meteorology data for the nearest weather station.
Because the project covered a large geographic area, rainfall measurements differed between nearby weather stations. The dispute ultimately centred on how the policy phrase “location insured” should be interpreted when determining whether the rainfall threshold had been met.
The court accepted the insurer’s interpretation that the relevant location was the specific part of the project where the damage occurred, rather than the broader project area. As a result, the rainfall exclusion applied and the claim was denied.
Why understanding exclusions matters
Contract works insurance plays an important role in managing risk on construction projects. It transfers the financial risk of accidental loss or damage from project participants to the insurer.
However, the existence of exclusions means that not every loss will be covered. Parties must therefore understand the limits of the policy and assess whether additional protections are required.
In particular, contractors and principals should consider:
- whether defects exclusions could leave significant portions of a project uninsured;
- whether weather-related exclusions could affect projects involving earthworks or infrastructure;
- whether any sub-limits or endorsements modify the policy’s scope.
There are, of course, many types of exclusion that might be in your contract works policy beyond those mentioned above – each policy turns on its own terms and must be considered carefully alongside the project risk you are trying to protect from.
Key takeaway
Contract works insurance is intended to protect against unforeseen physical loss or damage during construction. However, that protection is shaped and restrained by the policy’s exclusions.
Understanding these exclusions is critical to assessing whether a project is adequately insured and to avoiding unexpected coverage gaps when damage occurs.
Ideally, get your contract works policy reviewed carefully to ensure it covers what you need. Reach out if you need an assessment.
