By James Hughes, Engineering Underwriter
The variable that creates the most issues is turnover because the initial premium calculation is based on an estimate that the builder/developer provides prior to the policy’s inception and the business’ actual turnover at year’s end determines the final premium payable.
This is similar in principle to the way Worker’s Compensation premiums are calculated and paid, with projections for the number of employees/wages provided upfront and the final premium payable at year’s end based on what actually transpired.
There are many good reasons for nominating a realistic turnover in your contract works policy from its inception. Being overly optimistic can mean you can end up paying too much for your insurance. Conversely, if you significantly underestimate your annual contracts turnover then you could be in for an unpleasant surprise when the final premium arrives at year’s end.
I recently had a client whose estimated turnover was $4 million and actual turnover was more than $11 million. Needless to say, the client was very unhappy about the additional premium he had to pay, which was in excess of $10,000 and he hadn’t budgeted for.
To add salt to the wound, the client hadn’t made a claim that year. On the flip side, he would have been fully covered had he claimed despite the fact he had significantly underestimated his turnover because of the nature of annual contract works policies.
To minimise the risk of clients paying too much premium, insurers create some buffer by requiring clients to pay only 75 per cent of the estimated provisional premium for annual contract works policies upfront and the remaining 25 per cent at year’s end.
In the event actual the business’ turnover is 75 per cent of what was estimated, no additional payment is required. If the turnover is between 75 and 100 per cent of the initial estimate, a lower pro rata final premium amount is payable.
The important thing to remember with contracts works policies is that an additional premium is payable on additional turnover, which needs to be factored into your budget for each new project.
And if your sum insured for an individual job is likely to exceed your project sublimit, be sure to notify your broker straight away to have your insurance policy updated accordingly. While you can pay an additional premium at year end for any extra projects your business takes on, that’s not the case with individual jobs that exceed your project limit and are excluded from your policy coverage.
Five tips for avoiding surprises with your contract works cover
- When quoting new jobs that will take you over your expected turnover for the year, don’t forget to factor the additional premium into your budget. Your broker can tell you what rate (percentage) of additional turnover you need to set aside for your insurance cover.
- Let your broker/insurer know before you commence any work that’s different to what’s stated in your policy. Premiums for commercial work are costed differently to residential. You may not be covered for work that’s different to what’s stated in the policy.
- If the cost of a project looks like exceeding your sublimit for individual jobs, notify your broker/insurer as soon as possible as this will impact your insurance cover.
- Consult your broker about any new contracts to ensure they don’t conflict with your contract liability cover.
- Set aside time in your schedule annual to review your contract works policy with your broker on an annual basis – to ensure your business has the optimal level of cover.
This article has been published by Lumley Insurance, part of Insurance Australia Group (IAG), as general information only and is not a comprehensive account. For full details of the insurance products offered by Lumley Insurance, please read the relevant Policy Wordings available from www.lumley.com.au.