The long and the short: IF IT IS, YOUR PUBLIC LIABILITY INSURANCE MAY NOT COVER IT
Here's an example of a real claim that was declined by an insurer.
"My client is a builder, contracted to provide $400,000 of building services to a principal to complete his house. The plumber contracted by my client supplied a faulty product which leaked and caused some damage. Leaving aside the subbie's liability, the insurer has declined by client's public liability claim on the basis that the whole house is his product, and according to the policy wording there is no liability cover for damage to his product. If this is the case, every builder in the country has no cover for damage to any house he is building, even if he is building from the ground up."
And here is the response from an insurance law specialist.
"The technical position under the policy depends almost entirely on what the definition of "product" is under the policy. That definition often refers to something constructed by the insured. The key issue is that broadform/public liability insurance only covers liability for damage resulting from what the insured sold, supplied or worked on. The worth of the cover varies depending on the nature of the insured's business. On the one hand, if the insured is an electrician, the cover is meaningful when he negligently installs a switchboard in a large warehouse that subsequently burns to the ground. The switchboard is his product and liability for the damage to it is not covered. But the rest of the warehouse is resultant damage to that product and so there is potentially cover for it. On the other hand, if the insured is the head contractor that constructed the whole warehouse and negligently burns it down (ignoring contract works insurance for the moment), the whole warehouse is the insured's product and there will be little meaningful cover unless the fire spreads beyond the warehouse to neighbouring property."
What does this mean for builders?
Fortunately, CBA Insurances has been placing its clients' public liability insurance with a specialist construction industry insurer for many years, and their policy wording specifically addresses this issue. Under this policy, a house being built would not be considered the "Insured's Product" and would be covered in the event of a claim like the one above.
Some insurers have now copied this approach, so cover for builders is improving, however many builders are still unaware of how their own insurance responds in this situation, and that cover which better suits their business is available. Our advice is to read your policy wording, paying particular attention to the definition of "Insured's Product" and contact your broker or insurance adviser to seek assurance on this point.
Source: IBANZ iNavigator (www.inavigator.co.nz), published in CoverNote magazine, September 2015, abridged.