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Mar 07

Insuring Principal Supplied Materials

Principal Supplied Materials – What Builders Need to Know About Insurance Coverage

When undertaking construction projects, builders can work with materials that are supplied by the project owner or principal.

These Principal Supplied Materials (PSM) can include anything from structural steel and electrical transformers to kitchen cabinetry and appliances.

While these materials may not be part of the builder’s contract value, they can pose significant financial risks if not properly insured.

Key Definitions

  • Contract Works Insurance: A type of insurance that covers physical loss or damage to construction projects, including materials, from risks such as fire, theft, vandalism, or weather-related events.
  • Policy Exclusions: Specific conditions or items that are not covered under an insurance policy.
  • Sub-limit: A maximum limit of coverage specified within an insurance policy for particular items or categories, such as Principal Supplied Materials.
  • Endorsement: An amendment or addition to an insurance policy that modifies its terms and coverage.
  • Coverage Gap: The portion of financial exposure not covered by an insurance policy, potentially leaving the builder or principal at risk.

What Are Principal Supplied Materials?

Principal Supplied Materials are materials or components that the owner (Principal) provides for the builder to install or use in construction. The value of these materials is typically not included in the total contract value.

Many Contract Works Insurance policies require Principal Supplied Materials to be explicitly declared and insured separate to the project value. If not, any damage or loss to these materials may not be covered under the standard policy, leaving either the builder or the principal exposed to financial loss.

Why Insuring Principal Supplied Materials is Critical

Without proper insurance, builders may find themselves in situations where:

  • The construction contract holds them liable for damage to PSM.
  • The insurance policy only provides limited or no coverage for PSM unless specifically added.
  • The cost of replacing PSM falls entirely on them or the principal, leading to unexpected financial burden.

Practical Steps for Builders to Protect Themselves & Their Customers

  1. Review the Contract – Identify who is responsible for insuring PSM. If it’s the builder, ensure the value is declared and included in your Contract Works Insurance policy. If it’s the Principal, make sure you check that they have the necessary insurance in place and that they are aware that you are NOT insuring the materials they supply.
  2. Understand Your Policy Limits – Many Contract Works policies have sub-limits or full exclusions for Principal Supplied Materials. If the materials are high-value, ensure the policy limit is sufficient.
  3. Communicate with Your Broker – If you are responsible for insuring materials supplied by a Principal, ensure that you provide details to your broker before work begins to avoid coverage gaps.
  4. Factor Insurance Costs into Pricing – If additional insurance to cover Principal Supplied Materials is needed, account for this additional cost in your pricing and client agreements.
  5. Encourage Principals to Seek Their Own Insurance – Under standard contract terms, the Principal is often the one responsible for insuring any materials that they supply. It may be more practical for the principal to arrange separate insurance coverage for the materials they supply.

Failing to properly insure Principal Supplied Materials can lead to costly losses and contract disputes. Builders should discuss PSM coverage with their insurance broker before starting a project, ensuring they have the right protection in place.

If you’re unsure about your current policy coverage, speak to us today to avoid unnecessary risks on your next project.

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