Construction Insurances Explained – Contractors’ All Risks Insurance

B) Contractors’ All Risks Insurance

There are several terms used in the insurance world that mean different things to different people and one of these is Contractors’ all risks (CAR) insurance. The term is sometimes used to refer to both the material damage and liability covers required by a Contractor. Most insurance practitioners would regard CAR as referring only to the material damage cover on the contract works unless the real intention was obvious from the rest of the text. Anyone using the term, whether verbally or in writing, should make their intention clear, so as to avoid any ambiguity in interpretation.

CAR covers what is stated within the actual insurance policy for which the premium is paid. The Employer has the opportunity to specify his requirements as to what is to be included within the CAR within the contract if the Contractor is responsible for the provision of such insurance alternatively the Employer specifies the cover within the policy he takes out where the Contractor is not obligated to provide insurance under the Contract.

A CAR policy provides insurance coverage when the Works being constructed, as defined in the Contract, are damaged by an insured peril and require replacing and/or repairing. It is normal for the Contract to stipulate who will provide this cover. If it were the Contractor then it would be normal for them to take out a specific policy to cover the project or alternatively if available to them add it to a policy covering all their contracts up to a specific limit. In the event the responsibility should fall upon the Employer then cover would normally be under a policy arranged specifically for that project.

When arranging the CAR coverage for a project it is essential that care be taken in identifying the correct Contract Value, Construction Period, Defects Liability Period and Description of the Works. The policy will normally cover any physical loss or damage unless the cause is specifically excluded, thus the term ‘All-Risks’ whilst commonly used, is to some extent, misleading. Nevertheless the cover is very wide and embraces protection against fire, aircraft, explosion, earthquake, riot, malicious damage, storm, flood, burst pipes, impact and other accidental damage. However, CAR policies can be issued covering loss or damage by particular and specified perils, e.g. fire, flood, storm. In both cases the policy should generally be extended to provide protection in respect of damage by terrorists where such is commercially available.

In addition material damage to the Works or the machinery being erected CAR generally includes coverage for third-party liability for bodily injury and property damage to the surrounding properties. The policy can in some circumstances be extended to include consequential losses or losses due to delay in start-up following loss or damage under material damage section. This cover is also called advanced loss of profit.

Either way it is imperative that the parties fully understand what exclusions apply or which perils are listed to ensure that the cover gives sufficient protection to the Employer and the Contractor. The Sum to be insured under CAR should be adequately calculated and must include at least the Contract Value, value of Contractors’ plant and machinery, value of Employers existing property, estimated cost of debris removal, value of all temporary facilities, tax and an allowance for inflation. In addition it is wise to make sure that on site as well as offsite storage facilities are included under the policy together with the value of any free issue materials where the Employer transfers the risk to the Contractor under the Contract.

The policy should always be in the joint names of the Employer and Contractor although the Contract may stipulate that the Bank or Financing institutions are also named in the policy, depending upon their specific requirements for providing project financing.

Joint names insurance is where two or more parties (for example the Employer and the Contractor) are jointly insured under a single policy. Each party has legal rights under the policy and can claim against the insurer, but the insurer has no right of subrogation against the other insured party.

It is important to remember that each party is bound by the normal rules, and to avoid any difficulties each should individually comply with the duties of disclosure and notification.

Having an interest noted on a policy is very different and is rarely an acceptable substitute for a joint names policy.

A third-party is not a party to the contract of insurance, and thus cannot claim against the insurer. Similarly, it does not prevent the insurer from exercising rights of subrogation against the third-party.

PAM, IEM, FIDIC and generally most standard forms of contract contain fairly detailed provisions for property and liability insurance. Generic amendments to these insurance provisions are not normally essential, however, discreet changes may be required depending on the nature of a specific project (for example, amending the definition of joint names insurance policy to include the project funders, or to reconcile the standard provisions with a project insurance policy taken out by the Employer).

All CAR policies will have an excess that will be deducted from any claim settlement. On occasions insurers will apply more than one excess under a policy for specific losses where a certain risk warrants such and additional excess being imposed.

In addition generally most policies include exclusions for which extensions of CAR coverage maybe granted or included within the CAR coverage of the CAR policy may be extended to cover such as:

(A)        professional fees;

(B)        automatic reinstatement of the policy limit following a loss;

(C)        debris removal;

(D)        free issue materials;

(E)        discovery of munitions of war;

(F)         inflation clause;

(G)        plans and documents;

(H)        others.

Individual insurance providers specialising in this class of insurance will also have their own list of extensions that they will negotiate with insurers. As an example you may refer to the example provided which is so provided as an example and these will vary depending upon the general insurance market at the time the CAR insurance is taken out by the insuring party.

In addition the parties need to consider if the CAR policy is to cover the respective party’s to the Contract for:

Additional cost of construction of un-built works in the event of

(A) Inflationary Costs

(B) Out of sequence working

(C) Defective design, materials and workmanship

(D) Extended defective condition exclusion

(E) Limited defective condition exclusion

(F) Design improvement exclusion

It is understood that various legal challenges are currently on-going as to the validity of these clauses and therefore whilst the description of coverage above may not reflect the current or future legal interpretation. As with all contractual documentation it is recommended that all parties seek professional advice in respect of these risks.

It should be noted here that if the Contractor arranges CAR cover it may restrict or even remove the ability of the Employer to purchase any consequential loss coverage.