Insurance deductibles act as a form of cost-sharing between you and your insurer, but not knowing about a deductible can lead to unpleasant financial surprises.  

This blog is your guide to understanding deductibles in contractor works insurance. We’ll explain the ins and outs of deductibles and provide tips to help you make the best decisions for your business

How Deductibles Work for Contract Works Insurance

A deductible is the portion of a covered claim that you, the contractor, are responsible for paying before the insurance company steps in. It’s a way to share financial risk between you and the insurer.

Generally, choosing a higher deductible will result in a lower insurance premium, and vice versa.

The deductible is applied on a per-claim basis. Even if a single event damages multiple items, it might still be considered one claim with a single deductible.

How It Works in Practice

Let’s use an example to illustrate this:

  1. Your Deductible: Your contract works insurance policy has a standard deductible of $2,000.
  2. Covered Event: A storm damages the construction site, and the cost of repairs is assessed at $15,000.
  3. Your Responsibility: You’ll pay the first $2,000 (the deductible) toward the repair cost out-of-pocket.
  4. Insurer’s Responsibility: Your insurance company will cover the remaining $13,000 as long as the damage falls within your policy’s coverage.

If you are a new builder, this blog is just for you to get started and learn more about contract insurance

tradie insurance 4Common Types of Deductibles for Contractor Works Claims

Here’s a list of common deductible types for contractor works claims in Australia. Please note that specific deductibles and terminology can vary between insurers.

Common Types of Deductibles

  • Standard/Flat Deductible: A fixed dollar amount you pay for each claim. This is the most common type of deductible.
  • Percentage Deductible: A percentage of the insured value of the property or the total claim cost that you’ll be responsible for paying.
  • Event Deductible: A higher deductible is applied on claims from specific catastrophic events (like earthquakes, floods, cyclones).
  • Disappearing Deductible: The deductible amount reduces (or even disappears) as the cost of the claim increases. This is less common but might be seen in specialised policies.
  • Nil Deductible: In some cases, you may be able to opt for a policy with no deductible in exchange for a higher premium.

Important Considerations

  • Multiple Deductibles: A single claim may have multiple deductibles applied to different aspects (e.g. material damage and liability).
  • Contract Requirements: Your construction contract with the client may specify deductible requirements, impacting your choice. (Click to Learn about how to tailor contract insurance for your next construction project)
  • Excess: “Excess” is often used synonymously with “deductible” in Australia.

Potential Regional Differences Across Australia

Your broker is the best resource to understand regional variations in deductibles within Australia. They’ll have insights into local risks and how different insurers address them.

While most insurance policies offer similar core deductible structures across Australia, there are potential regional differences based on the following categories:

  • Catastrophic Event Deductibles: In areas prone to cyclones, floods, bushfires, or earthquakes, insurers may include higher deductibles specifically for claims arising from these natural disasters.
  • Construction Activity Variation: Regions with booming construction activity might have slightly higher deductibles due to increased demand for building materials and services, which impacts repair costs after an incident.
  • Location-Specific Risks: Factors like proximity to the coast, soil types, or crime rates could subtly influence your premium and even affect your deductible amount. It’s less about widespread regional differences and more about the micro-level risks associated with your specific project location.
  • Insurance Company Practices: Different insurers can have distinct risk evaluation criteria and underwriting practices. Some may adopt stricter deductible policies in certain locations based on their internal assessments.

Click here to read more about how to claim your contract work insurance.

If you are a manager at construction work, click here to learn how contract insurance can protect you.

tradie insurance 2How Deductibles Interact with Policy Limits

Here’s how deductibles and policy limits work together in determining your insurance coverage:

  • Policy Limit: This is the maximum amount your insurance company will pay for a covered claim. Think of it as the ceiling of your coverage.
  • Deductible: This is the amount you have to pay out-of-pocket before your insurance policy starts contributing to cover the costs of a claim.

Relationship Between Deductibles and Policy Limits

  1. Deductible Comes First: The deductible is always subtracted from the total amount of the claim before your policy limit comes into play.
  2. Example:
  • Say your policy limit is $50,000, and your deductible is $2,000.
  • You have a covered incident causing $20,000 in damages.
  • First, your $2,000 deductible is subtracted, leaving $18,000.
  • Your insurer will then cover up to $18,000 because it falls below your policy limit.
  1. High Claim, Low Limit:
  • Imagine a different scenario where you incur $60,000 in damages with the same $50,000 policy limit and $2,000 deductible.
  • After your deductible is subtracted, there’s $58,000 of potential costs.
  • Your insurance will only cover $50,000 (it’s limit), leaving you responsible for $8,000 despite having insurance.

Impact on Premium Calculation

The interaction between deductibles and policy limits directly influences your insurance premium:

  • Generally, lower deductibles often mean higher premiums because the insurer’s financial risk increases.
  • Choosing higher deductibles may lead to lower premiums since you cover a greater portion of the costs before the insurer has to pay any claims.

Learn more about contracts work insurance.

Factors Influencing Your Contract Works Deductible

Here are the key factors that can significantly influence the deductibles applied to your contract works insurance:

  1. Type and Scope of Work:
    1. Risk Level: Riskier projects, like those involving heights, excavation, complex structures, or hazardous materials, naturally lead to higher deductibles.
    2. Project Value: Larger, more expensive construction projects generally have higher deductibles since the potential financial loss is greater.
  1. Location and Environmental Factors:
    1. Natural Disasters: Areas prone to cyclones, floods, and bushfires, often face higher deductibles, especially for event-specific coverage.
    2. Local Risks: Factors like proximity to the coast, soil conditions, or crime rates in your specific project location could subtly influence your deductible.
  1. Your Claims History:
    1. Past Claims: Insurers take your claims record into account. Frequent claims or a history of major incidents can lead to higher deductibles on new policies.
    2. Safety Record: Your commitment to on-site safety and loss prevention strategies may positively impact your deductibles.
  1. Your Financial Risk Capacity:
    1. Business Size: Larger construction businesses may be able to tolerate higher deductibles in exchange for lower premiums.
    2. Cash Flow: If your business can withstand absorbing a significant deductible in an event, you could secure a lower premium by opting for a higher deductible.
  1. Insurer’s Practices:
    1. Underwriting Criteria: Different insurers have their own risk assessment models and underwriting standards that influence how they structure deductibles.
    2. Negotiation: In some cases, you might be able to negotiate your deductible with an insurer, particularly if you can demonstrate a robust safety program or an excellent risk profile.
  1. Contractual Requirements:
    1. The Client’s Mandate: Your construction contract with the client may specify minimum insurance coverage levels and might even prescribe deductible amounts.

If you are a manager at construction work, click here to learn how contract insurance can protect you.

contractor work insurance 4Tips for Managing Contract Works Insurance Deductibles

To effectively manage your contract works insurance deductibles, consider these essential tips:

  1. Firstly, carefully assess your business’s financial capacity to withstand potential deductibles and choose a level that aligns with your risk tolerance.  Review your claims history and the specific risks associated with your projects to make informed deductible decisions.
  2. Investigate potential savings by opting for higher deductibles. Regularly re-evaluate your policy and deductible amounts as your business and project portfolio evolves. 
  3. Maintain clear documentation of incidents and communicate effectively with your insurer to streamline the claims process in case you need to make a claim.

Choosing the right deductible is a crucial step in protecting your contracting business. At Tradies365, we understand the nuances of construction risks and contract projects and are dedicated to helping you find insurance solutions that safeguard your bottom line. Contact us today for a personalised consultation. 

Our expert advisors will guide you through the decision-making process, ensuring you have the coverage you need and the deductibles that align with your business risk profile. 

Don’t leave your projects exposed – secure your peace of mind with Tradies365.

Note: The material offered here is for informational purposes only. It does not constitute legally binding advice and should not be a substitute for a consultation with an insurance expert.