What is CAR Insurance? Complete Guide for International Contractors

What is CAR Insurance?

Contractors All Risks (CAR) insurance is a specialized form of coverage designed to protect construction projects against physical loss or damage during the construction phase. It provides comprehensive protection for contractors, project owners, and other stakeholders involved in building and civil engineering projects.

The term "All Risks" is somewhat misleading—CAR policies don't cover everything. Instead, they cover all risks of physical loss or damage except those specifically excluded in the policy. This is the opposite of "named perils" policies that only cover specific listed events.

CAR insurance originated in the UK and European markets and is now the standard form of construction insurance used worldwide, particularly in markets influenced by British insurance practices. In the United States, the equivalent coverage is often called "Builders Risk" or "Course of Construction" insurance, though there are some differences in policy structure.

Who Needs CAR Insurance?

CAR insurance is essential for various parties involved in construction projects:

Contractors and Subcontractors

The primary contractor is usually responsible for arranging CAR insurance under most standard construction contracts (like FIDIC). The policy typically extends to cover all subcontractors working on the project.

Project Owners and Developers

While contractors usually procure CAR insurance, project owners often require specific coverage terms to protect their interests. Owner-controlled insurance programs (OCIPs) are common on large projects.

Financial Institutions

Banks and lenders financing construction projects require CAR insurance to protect their investment. They're often named as additional insureds with "loss payee" clauses.

When is CAR Insurance Required?

• New building construction (commercial, residential, industrial)
• Civil engineering works (roads, bridges, tunnels, dams)
• Renovation and extension projects
• Infrastructure development (airports, ports, railways)
• Energy projects (power plants, substations—though EAR may be more appropriate)

What Does CAR Insurance Cover?

A standard CAR policy typically includes three main sections of coverage:

Section I: Contract Works (Material Damage)

This is the core of CAR coverage, protecting the physical construction works against loss or damage from any cause not specifically excluded. Coverage includes:

• Permanent works: The structure being built
• Temporary works: Scaffolding, formwork, shoring
• Materials on site: Construction materials stored at the project location
• Materials in transit: Coverage for materials being transported to site
• Materials at other locations: Off-site storage of materials

Section II: Third-Party Liability

Protection against legal liability for bodily injury or property damage to third parties arising from construction activities. This includes:

• Injury to members of the public
• Damage to neighboring properties
• Liability from construction activities like vibration, removal of support

Section III: Owned Plant and Equipment

Optional coverage for contractor's own plant and equipment used on the project. This may include:

• Cranes, excavators, and other construction machinery
• Temporary buildings and site offices
• Tools and equipment

Common CAR Insurance Exclusions

Standard Exclusions

• War and terrorism: Though terrorism can often be bought back
• Nuclear risks: Damage from radioactive contamination
• Wilful misconduct: Intentional damage by the insured
• Consequential losses: Indirect financial losses (covered by DSU)
• Wear and tear: Normal deterioration of materials
• Defects in design, materials, or workmanship: The "DE3" or "LEG3" clause determines how defect damage is treated

Typical Sub-limits and Conditions

• Natural catastrophe events (earthquake, flood, windstorm) may have sub-limits
• Higher deductibles for certain perils
• Waiting periods for certain types of loss
• Storage location restrictions
• Security requirements

Key Policy Extensions to Consider

Standard CAR policies can be enhanced with extensions to provide more comprehensive protection. Here are the most important ones:

Delay in Start-Up (DSU/ALOP)

Also called Advanced Loss of Profits (ALOP), this extension covers financial losses when the project is delayed due to insured physical damage. Essential for projects where revenue generation is time-critical.

Extended Maintenance Coverage

Extends coverage during the defects liability period (typically 12-24 months after completion). Protects against damage discovered during maintenance period that occurred during construction.

Professional Fees

Covers fees for architects, engineers, and other professionals needed to redesign or reconstruct damaged works.

Debris Removal

Covers costs of removing debris after a loss, which can be substantial for large structures.

50/50 Clause

Covers the first 50% of the cost to locate the source of damage when it's not immediately apparent.

Calculating Adequate Coverage Limits

Determining the right sum insured is critical. Underinsurance can result in proportional reduction of claims (average clause).

Sum Insured Should Include:

• Contract value (including materials and labor)
• Value of materials and equipment supplied by the employer
• Professional fees for reconstruction (typically 10-15%)
• Debris removal costs (typically 10%)
• Any anticipated variations or escalation

Common Formula:

Example: For a $100M contract, the sum insured might be calculated as: $100M + $0 (no employer materials) + $15M (fees) + $10M (debris) + $10M (escalation) = $135M

CAR vs. EAR Insurance: Understanding the Difference

While CAR and EAR (Erection All Risks) are similar in structure, they're designed for different types of projects:

For projects involving both construction and machinery installation (like power plants), a combined CAR/EAR policy may be appropriate.

CAR Insurance in Emerging Markets

Securing adequate CAR coverage for projects in emerging markets presents unique challenges:

Common Challenges

• Limited local capacity: Local insurers may lack sufficient limits
• Natural catastrophe exposure: Higher risks of earthquake, flood, typhoon
• Political and regulatory risks: Contract frustration, currency issues
• Claims infrastructure: Lack of qualified loss adjusters
• Policy wording issues: Local policies may not meet international standards

Solutions

• Access international markets (Lloyd's, Singapore, Dubai) for capacity
• Use fronting arrangements with local insurers where required
• Ensure policy wording meets FIDIC or other contract requirements
• Appoint international loss adjusters in the policy
• Consider political risk insurance separately

The CAR Insurance Claims Process

Understanding the claims process helps ensure smooth settlement:

Immediate Steps After a Loss

1. Notify insurer immediately—most policies require notification within 7-14 days
2. Take steps to minimize further damage—this is a policy requirement
3. Document the damage—photographs, videos, written records
4. Preserve damaged materials—don't dispose without insurer approval
5. Prepare preliminary loss estimate

Documentation Required

• Completed claim form
• Photographs and videos of damage
• Invoices and receipts for damaged materials
• Repair estimates or quotations
• Weather reports (if weather-related)
• Police reports (if theft or vandalism)
• Expert reports (structural engineer, etc.)

Best Practices for CAR Insurance

Before Purchasing

• Review contract insurance requirements carefully
• Engage an independent insurance advisor for complex projects
• Compare multiple quotes on like-for-like basis
• Don't focus only on premium—coverage quality matters more

During the Policy Period

• Maintain good site security and housekeeping
• Report any incidents promptly, even if no immediate claim
• Keep detailed records of all materials and work progress
• Update insurer on any significant project changes
• Review coverage adequacy if project value increases

Claims Management

• Establish relationships with insurers before losses occur
• Document everything from day one of the project
• Consider appointing your own loss adjuster for large claims
• Don't admit liability without insurer consent

Frequently Asked Questions