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What is Building Indemnity Insurance?

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  • Written By: Staci A. Terry
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 11 November 2016
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Building indemnity insurance is an insurance policy that builders must obtain in some areas of the world when the building project has a value of a certain amount, and often requires development approval from the local governmental body. This type of insurance policy provides protection to the property owner in the event that the builder dies, disappears, or goes bankrupt during the construction period or within so many years after the construction is complete. Building indemnity insurance helps protect not only the current owner of the property but also subsequent property owners within a certain time frame. A building indemnity insurance policy may also offer coverage for injuries and property damage to third parties resulting from the builder’s negligence. These insurance policies are most prevalent in countries such as Australia.

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In South Australia, pursuant to the Building Work Contractors Act (1995), all registered builders must obtain a building indemnity insurance policy before taking on a building project with a value set by law, which is currently $12,000 Australian Dollars (AUD). These builders cannot accept payment for such a project or obtain a local government building license until they have purchased a building indemnity insurance policy and provided a copy to the homeowner or building owner. Any building projects under that value would not be subject to this requirement. Owner-builders, or builders who are building solely for themselves, must also take out this type of insurance policy if they intend to sell the property within seven years of obtaining the building license.

A builder or contractor would normally obtain a building indemnity insurance policy through a regular insurance company that offers such policies and coverage in this specialized situation. This sort of insurance policy only becomes applicable if the contractor does not complete the work or performs it in a faulty manner, and is not around to remedy the situation. Where a law requires the purchase of such an insurance policy, there is in essence a statutory warranty for the property in question under certain circumstances for a strictly defined period.

Most of these laws requiring the purchase of building indemnity insurance only apply to licensed builders and contractors. If a home or business owner utilizes a builder that is not licensed, he will not have the security of building indemnity insurance unless the builder has voluntarily chosen to purchase the policy. This is one reason hiring a licensed contractor is often advised.

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