Contractors All Risk (CAR)

What CAR is

A building, bridge or road under construction is exposed for months or years before anyone can use it. Contractors All Risk (CAR) insurance covers physical loss of or damage to civil construction works during the construction period. It protects the contract works themselves, the materials brought for them and the temporary structures put up to build them.

It is an all-risk policy. Instead of listing the perils that are covered, it covers physical loss or damage from any cause that the policy does not exclude. Contracts and lenders commonly require it, for projects ranging from residential buildings to highways, bridges and metro rail.

Two sections

Section I is the material-damage section: the works, materials and temporary structures described above. Section II is third-party liability. It covers the insured's liability for bodily injury or property damage caused to third parties by the construction activities, such as a passer-by hurt by falling material or a neighbouring wall damaged by excavation.

The sum insured under Section I is the full contract value, including materials, labour and profit. If it is set lower, the project is under-insured and the Average Clause reduces every claim in proportion, as the worked example shows.

What it does not cover

CAR pays for physical loss or damage, not for the financial consequences of a late project. Penalties and liquidated damages for delay are consequential losses and are excluded. The project owner's loss of anticipated revenue can be covered by a separate extension called Delay in Start-up (also known as Advance Loss of Profits), and that extension responds only where insured damage delays the project.

Defects are treated through the LEG clauses. LEG 1/96 excludes all loss due to defects. LEG 2/96 excludes the cost of remedying the defective part itself but covers the resulting damage to otherwise sound work. LEG 3/96 is the widest, excluding only the cost of improving the original design or workmanship. Which clause applies is settled between the contract parties and the insurer, so it has to be read from the policy.

The maintenance period

After handover, many contracts keep the contractor responsible for a maintenance period. CAR maintenance cover applies to loss or damage that occurs during that period but is caused by something that happened during construction, or by the contractor's own work on maintenance visits.

It is not a continuation of the full construction cover. New perils and wear and tear are not covered, and the cost of rectifying a defect itself stays excluded.

Rules at a glance

Key points

• CAR covers physical loss of or damage to civil construction works, materials and temporary structures during the construction period.
• Section I covers the works; Section II covers liability for third-party bodily injury and property damage.
• The sum insured is the full contract value including materials, labour and profit; under-insurance brings in the Average Clause.
• Liquidated damages and penalties for delay are excluded; Delay in Start-up is a separate extension that needs insured damage.
• LEG 1/96, 2/96 and 3/96 set how far defect-related loss is covered, from narrowest to widest.
• Maintenance cover is limited to causes originating in construction or the contractor's maintenance work.

Common misunderstandings

• All-risk does not mean every loss is paid: exclusions such as liquidated damages for delay still apply.
• CAR is not delay insurance: loss of anticipated revenue needs the Delay in Start-up extension, and that needs insured damage first.
• The LEG clause is not the same in every policy: the one that applies is settled between the contract parties and the insurer.
• Maintenance cover is not full cover after handover: new perils, wear and tear and the cost of rectifying the defect itself are outside it.

Questions people ask