10 Common Gaps in Construction Insurance Policies
Critical coverage gaps that can leave your project exposed—and how to address them before it's too late.
Construction insurance policies are complex documents with numerous exclusions, sub-limits, and conditions. Even experienced contractors often discover gaps in their coverage only when a claim is denied. This guide identifies the ten most common gaps we encounter in CAR/EAR policies and provides practical solutions to address them.
Review Your Policy Now
Don't wait for a claim to discover gaps in your coverage. Use this guide as a checklist to review your current CAR/EAR policy. Address gaps before they become costly uninsured losses.
Inadequate Natural Catastrophe Sub-Limits
Many CAR policies have sub-limits for earthquake, flood, or windstorm that are far below the full sum insured. A $100M project might only have $20M earthquake coverage.
In a major natural catastrophe event, you could face $80M+ in uninsured losses.
Review nat cat sub-limits carefully. Negotiate higher limits or purchase standalone nat cat coverage. Consider the actual probable maximum loss for each peril.
Design Defect Coverage Confusion
Standard CAR policies exclude damage caused by defective design. The LEG3/DE3 clause provides some coverage but is often misunderstood.
When a design flaw causes damage, disputes arise about what is and isn't covered. The cost of correcting the defect itself is never covered.
Ensure LEG3 or DE3 wording is included. Understand that it covers resultant damage to sound portions, not the defective item itself. Consider professional indemnity for design firms.
Defects Liability Period Gaps
Coverage during the defects liability/maintenance period is often limited to damage discovered that occurred during construction, not new damage during the maintenance period.
Damage occurring during the 12-24 month maintenance period may be uninsured.
Negotiate extended maintenance coverage that includes damage occurring during (not just arising from) the maintenance period. Understand the distinction clearly.
Missing DSU/ALOP Coverage
Many contractors focus on physical damage coverage and neglect Delay in Start-Up. Standard CAR explicitly excludes consequential losses.
A 6-month delay from an insured event could mean millions in lost revenue, ongoing financing costs, and contractual penalties—all uninsured.
Purchase DSU coverage with adequate sum insured and indemnity period. Essential for any revenue-generating project or where financing costs are significant.
Subcontractor Coverage Uncertainty
It's often unclear whether subcontractor work and equipment is covered under the main CAR policy or requires separate insurance.
After a loss, disputes arise about which policy responds. Gaps can leave subcontractor work uninsured.
Ensure the CAR policy clearly covers all subcontractor work. Verify subcontractors are named as additional insureds. Check for flow-down of coverage in subcontracts.
Testing and Commissioning Limitations
Standard CAR policies provide limited coverage during testing. Hot testing, performance testing, and machinery breakdown during commissioning are often excluded.
Damage to equipment during the critical testing phase—when equipment is most vulnerable—may not be covered.
For projects with significant mechanical/electrical components, use EAR or combined CAR/EAR policies. Ensure testing coverage is explicitly included.
Existing Property Exclusion
CAR policies typically exclude damage to existing structures. This is critical for renovation, expansion, or brownfield projects.
Damage to existing buildings or infrastructure during construction work is uninsured.
Purchase "Existing Property" extension. Clearly define what constitutes existing vs. new works. May need separate property policy coordination.
Insufficient Third-Party Liability Limits
Section II liability limits are sometimes set too low for the actual exposure, especially in urban areas or near critical infrastructure.
A major third-party claim could exceed policy limits, leaving you personally liable for the excess.
Assess realistic third-party exposures. Consider surrounding properties, public access, and worst-case scenarios. Liability limits should reflect actual potential claims.
Off-Site Storage Not Covered
Materials stored off-site (in warehouses, at suppliers, in transit) may not be covered unless specifically included.
Fire or theft at an off-site warehouse destroys $5M in materials—uninsured.
Ensure off-site storage extension is included with adequate limits. Verify transit coverage is in place. Document storage locations.
Terrorism Exclusion
Standard CAR policies exclude terrorism in many markets. This exclusion has become broader post-9/11.
Damage from a terrorist attack leaves you with no insurance recovery.
In higher-risk locations, purchase terrorism buy-back. Assess the realistic threat level. Some government pools provide terrorism coverage.
How to Conduct a Gap Analysis
We recommend a systematic approach to identifying coverage gaps:
- List all project risks: What could go wrong? Include physical damage, liability, delay, and third-party exposures.
- Map risks to policy sections: For each risk, identify which section of your CAR/EAR policy should respond.
- Check exclusions: Review all exclusions to see if any apply to your identified risks.
- Verify limits: Are sub-limits adequate for realistic loss scenarios?
- Review conditions: Are there conditions (security, notification, etc.) that could void coverage?
- Document gaps: Create a list of identified gaps with recommended solutions.
The Cost of Gaps vs. Premium Savings
Sometimes coverage gaps exist because buyers chose lower-cost options. While premium savings are important, they must be weighed against the potential cost of uninsured losses.
Example: Saving $50,000 in premium by accepting a $10M earthquake sub-limit instead of full limit seems attractive—until a $30M earthquake loss occurs. The $20M gap far exceeds decades of premium savings.
We recommend explicit decisions about risk retention rather than accidental gaps caused by not reading the policy carefully.
Get a Professional Gap Analysis
Our advisors can review your construction insurance program and identify gaps specific to your project. Independent analysis ensures nothing is missed.