What happens if my builder isn’t insured or is underinsured

Customer looking distressed as builder stands in the background looking worried.

When you’re having building work carried out on your home, there is a potential chance of damage to your home’s structure or its contents.

Insurance companies are acutely aware of this, so it is important that you inform them of the planned work before the work begins and to discuss what you’re planning.

It is also common courtesy to discuss your plans with your immediate neighbours, as they will likely be affected by the finished building work and by the noise and street congestion during the build.

If you’re having your dream extension built onto your home, or other building work done, the last thing you want is for something to go wrong with the build. If this occurs, your builder’s liabilities insurance policies will usually cover any damage or extra work that needs doing. However, in some unfortunate instances, a builder can turn out to be underinsured.

We look at what this means for you the customer and what the potential impact could be on the tradesperson in question.

What is underinsurance?

Underinsurance is if the sum insured on the policy isn’t enough to cover losses. As an example, this can occur when you insure the contents of your business premises, but over the course of the policy year you make significant expensive purchases, such as computers, and do not add them to the contents aspect your policy.

A monetary example is shown below to highlight the risk.

  • The contents are insured for £5,000
  • Your assets are worth £12,000
  • Therefore, your business is underinsured by £7,000

Whilst underinsurance can be an oversight by the insured, it can also be deemed as a deliberate action by the policyholder to reduce their annual premium. Doing this increases the risk of a financial loss, and in some instances it can void the insurance altogether.

As a client, what happens if you employ a tradesperson to do a job at your home, something goes wrong, and it turns out the tradesperson is underinsured?

If the tradesman’s insurance will not cover the damage and loss when you make a claim against their policy, then they will be liable to cover the excess loss out of their business finances. However, this may not be feasible, depending on the financial health of the tradesman’s business, which could leave you having to pay for the extra costs yourself.

What impact will underinsurance have on the tradesman?

Regardless of whether being underinsured is an accidental oversight or a deliberate act, the impact of underinsurance can be widespread and damaging. For the tradesperson in question, it can not only be significant financially, but can also cause reputational damage which can have a negative impact on future income.

The shortfall in cover isn’t just the difference between what you need and the sum insured. Insurers can also apply the ‘average clause’ which can have an even greater impact of the sum paid out.

Ensure you’re aware of the ‘average clause’

If the average clause is used by your insurer, it will be in the terms and conditions of your insurance policy. It is a formula a lot of insurers use and is triggered in cases of underinsurance. It means the insurer can reduce the payout by the amount you are underinsured by (1).

So, if you need to make a claim for £20,000 but you’re only insured for £10,000, then you would be 50% underinsured. Therefore, if you make a claim for the full £10,000 of cover, your insurer would be within their rights to only payout 50% of your claim (£5,000).

This is a relatively insignificant example that could be representative of a claim for a tradesperson’s office contents. However, if the tradesperson’s business was underinsured for a residential or commercial building project, such as a house extension or renovations, then the shortfall in the claim payout could be a lot greater.

What are the customer's options regarding a claim?

In the event of a claim, the underinsured would have to fund the shortfall out of their own pocket. If the tradesman in question cannot do that, then this could cause an issue for the customer as well as a serious financial issue for the tradesman’s business.

In a scenario like this, it might be pertinent to speak to Citizens Advice or a solicitor, to find out what your next course of action could be to recoup your loss.

How do customers prevent this situation?

Due diligence when commissioning anyone to undertake work for you is key to reducing your exposure to any sort of risk, including underinsurance. When you are negotiating with tradespeople, ask them as many questions as you need to be sure they can deliver the job for you. Also, ask them to prove their insurance credentials prior to agreeing to give them the work, to ensure your assets will be fully covered if something goes wrong.

At the very least, the tradesperson should be able to prove they are carrying adequate public liability insurance.

Another form of insurance they may present to you to confirm cover is contract works insurance. Contract works insurance is designed to protect building works in progress. The policy will cover the cost of re-doing work that is part of a contract, including the tools, materials and labour required for the work, if the existing work is damaged by fire, flood, or theft during construction.

Where can you, the consumer, look for help?

• Citizens Advice – Online and free advice to help you find a way forward to resolve an issue. As a consumer you could contact Citizens Advice. Adviceline (England): 0800 144 8848  Adviceline (Wales): 0800 702 2020

 Gov.uk – The Gov.uk website has an in-depth page covering ‘Your rights and legal support’, where you can find advice and assistance. The page includes information about legal aid, consumer advice, discrimination, work, and residential property disputes.

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