Non-Renewable (one-off) Covers

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Contractors’ all risks (CAR) insurance

The basic concept is to offer comprehensive and adequate protection against loss or damage in respect of the contract works, construction plant, equipment and machinery, as well as against third-party claims in respect of property damage or bodily injury arising in connection with the execution of a construction project.

A CAR policy may be concluded by the principal or by the contractors engaged in a project, including all subcontractors. CAR insurance provides an “all risks” cover – every hazard is covered which is not specifically excluded. This means that almost any sudden and unforeseen loss or damage occurring during the period of insurance to the property insured on the construction site will be indemnified.

The most important causes of losses indemnifiable under CAR insurance are:

  • Fire, lightning, explosion
  • Flood, inundation
  • Windstorm of any kind
  • Earthquake
  • Theft, burglary
  • Bad workmanship, lack of skill, negligence, malicious acts or human error.

The cover provided by CAR insurance is subject only to a few standard exclusions which the international insurance market usually applies. The exclusions are named in the policy and essentially comprise:

  • Loss or damage due to war or warlike operations, civil commotion of any kind as well as acts on the part of strikers and locked-out persons,
  • Loss or damage due to nuclear reaction, nuclear radiation or radioactive contamination,
  • Loss or damage due to willful acts or willful negligence of the insured or of his representatives,
  • Consequential loss of any kind or description whatsoever, including penalties, losses due to delay, lack of performance, loss of contract,
  • Loss or damage due to faulty design,
  • The cost of replacement, repair or rectification of defective material and/or workmanship. However, consequential material damage is covered,
  • Wear and tear,
  • Loss or damage due to mechanical and/or electrical breakdown or derangement of construction machinery, plant and equipment.

The cover attaches as from the commencement of work, or after the items entered in the schedule of the policy have been unloaded at the site, and terminates when the completed structure or any completed part thereof is taken over or put into service. The insurer’s liability for construction machinery, plant and equipment (optional cover) commences from their unloading at the site and expires on their removal there from.

Underinsurance is applicable if the sum insured on the date of the loss does not correspond to the replacement value of the objects insured on that date (value of the new item plus customs duties plus transportation and installation charges).

Cost of removal of debris is indemnified only if a separate amount for this cover has been included in the total sum insured.

In addition, it is possible to extend the period of cover to include a maintenance period.

Maintenance visits cover

The insurer’s liability during the maintenance period is limited to loss or damage caused by the insured in the course of the operations carried out for the purpose of complying with the obligations under the maintenance provisions of the contract.

Extended maintenance cover

In addition to the protection provided under the maintenance visits cover, this type of cover also includes loss or damage occurring during the maintenance period but caused during the construction period on the construction site.

Premium

The premium is based on:

  • Conditions on and exposure of the site (e.g. atmospheric and tectonic conditions, such as the probability of windstorm, earthquake, flood, inundation, fire hazards)
  • Design features and building materials
  • Construction techniques
  • Safety factors considered in the construction time schedule
  • Measures provided to ensure safe execution of the project.

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Erection all risks (EAR) insurance

This branch of engineering insurance offers comprehensive and adequate protection against all the risks involved in the erection of machinery, plant and steel structures of any kind, as well as third-party claims in respect of property damage or bodily injury arising in connection with the execution of an erection project.

The insured under an EAR policy is normally:

  • The manufacturer or supplier of machinery or plant if he carries out the erection work or is responsible for it, or
  • The contractor commissioned with erection work, or
  • The principal, the purchaser of the machinery or plant to be erected.

EAR insurance provides very wide cover. Almost any sudden and unforeseen loss or damage occurring to the property insured on the erection site during the period of insurance will be indemnified. The insurer will indemnify loss or damage due to the following causes:

  • Fire, lightning, explosion
  • Flood, inundation
  • Windstorm of any kind
  • Earthquake
  • Theft, burglary
  • Faults in erection
  • Negligence, lack of skill, lack of experience, malicious acts
  • Short-circuit, arcing, excess voltage
  • Excess pressure or vacuum, tearing apart on account of centrifugal force
  • Any other sudden and unforeseen event such as loss or damage due to collapse, foreign objects, on-site transport of items to be erected, etc.

The cover is subject to only a few exclusions which are applied internationally and are common to the insurance industry. These exclusions are named in the policy and essentially comprise:

  • Loss or damage due to faulty design, defective material or casting, and/or bad workmanship; however, if the manufacturer of the machinery or plant to be insured is at the same time commissioned with the erection work and named in the policy as the insured, it is possible to include resultant physical damage in respect of the insured items due to the above-mentioned causes. However, the expenses for rectifying the original fault – had such fault been discovered before the loss occurred – are still excluded from the cover, Loss or damage due to willful acts or willful negligence of the insured or of his representatives,
  • Consequential loss of any kind or description whatsoever, e.g. claims from penalties, losses due to delay, lack of performance, loss of contract,
  • Loss or damage due to war or warlike operations, civil commotion of any kind as well as acts on the part of strikers and locked-out persons,
  • Loss or damage due to nuclear reaction, nuclear radiation or radioactive contamination.

The cover commences directly after the unloading of the items to be insured at the site and continues until the erection work and testing operations have been completed. It therefore includes loss or damage during storage, during the period of erection and during test, test loading or operation.

In addition, it is possible to extend the period of cover to include a maintenance period.

Maintenance visits cover

The insurer’s liability during the maintenance period is limited to loss or damage caused by the insured in the course of the operations carried out for the purpose of complying with the obligations under the maintenance provisions of the contract.

Extended maintenance cover

In addition to the protection provided under the maintenance visits cover, this cover also includes loss or damage occurring during the maintenance period but caused during the erection period on the construction site.

Maintenance guarantee cover

If the insured is the manufacturer of the machinery or plant to be insured and has also been commissioned with the erection work, the manufacturer’s liability for loss or damage during the guarantee period, as stipulated in the supply contract, can be included in the insurance to a certain extent in addition to the abovementioned covers.

Premium

Premiums are normally tailor-made and in order to arrive at a premium rate commensurate with the risk from an engineering point of view, it is essential for the insurer to obtain full particulars such as:

  • Technical specifications of the relevant project, the contract price, the value of the main items to be erected
  • Information on the experience of the erection contractor with similar projects
  • A flow chart of the production process, a layout plan (with a view to third-party liability)
  • The geological, hydrological and meteorological data on the erection site
  • The supply and erection time schedule, details on pre-storage facilities
  • Guard services, fire-fighting facilities.

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Principal’s advance loss of profits (ALOP) insurance

Principal’s advance loss of profits insurance, also known as advance loss of profits (ALOP) or delay in start-up (DSU) insurance, indemnifies the actual loss of gross profit sustained as a result of delayed commencement of business operation caused by an accident covered under the contractors’ all risks policy or the erection all risks policy.

ALOP insurance compensates for

  • standing charges (continuing business expenses) including the salaries and wages paid to employees plus the net profit,
  • the increase in cost of working, i.e. the additional expenditure necessarily and reasonably incurred for avoiding or diminishing a reduction in turnover, revenue or rentals.

The sum insured is for all normal cases the gross profit obtained from the turnover of goods produced or handled, services rendered or revenue or rentals achieved in the course of the insured’s business for a period of 12 months (i.e. normally for the business year). The period for which the insurance will indemnify losses is defined as the indemnity period which is determined by the insured depending upon the replacement period for the contract works, building or plant insured.

Instead of a monetary deductible this type of insurance is usually subject to a time excess of approx. 4 weeks per year of construction/erection period. The equivalent of the number of average daily values of the loss corresponding to the time excess is borne by the insured. The ALOP cover for CAR risks is of interest for all kinds of buildings and civil works where rentals or other revenue is achieved. This cover is advisable for EAR risks, i.e. all types of industrial plants being newly erected, extended or modernized. Also, single machines can be covered.

The premium is calculated in consideration of the following data:

  • The amount of the sum insured
  • The time excess and the maximum indemnity period limit
  • The kind/type and size of building, plant or machinery to be insured
  • The general and the special risk involved, like geological and climatic conditions
  • The fire-fighting and prevention measures during construction/ erection and pre-storage
  • The effect that physical damage would have on the gross profit (relative importance)
  • The reserve facilities and major spare parts available
  • The flexibility of the time schedule as well as buffer periods
  • The effect of local conditions
  • The possibilities of loss minimization including the chances to make up time
  • The prevailing economic and political conditions
  • The moral and technical hazards relating to each individual contractor and principal and their employees.

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Comprehensive project (CP) insurance

Comprehensive project insurance offers all-in-one insurance protection for the entire duration of a project. The multi-line policy provides cover for pre-storage followed by construction/erection, testing/commissioning and finally maintenance works. The cover ceases once the project has been completed and/or handed over to the operator or the employer. The policy can be taken out for civil engineering and infrastructure projects as well as for the erection of machinery, plant or steel structures of any kind. The insurance may be concluded by the employer and/or by the contractors engaged in a project, including all subcontractors.

The comprehensive project insurance policy has the following structure:

  • General section (Definitions, general exclusions and general conditions)
  • Section Ia (Material damage to contract works)
  • Section Ib (Material Damage to plant, machinery & equipment)
  • Section II (Third party liability)
  • Section III (Delay in start-up).

In addition a marine cargo cover, including DSU, can be attached in order to provide a comprehensive project cover from the beginning.

Depending on the type of project and requested scope of cover the insured can take out any of the above sections and tailor his comprehensive project insurance policy in accordance with his insurance requirements.

The general section and Section Ia (material damage), however, are to be considered compulsory. The general section contains definitions, general exclusions and general conditions which are applicable to all sections. The general exclusions are in line with those found in construction and erection all risks insurance policies used in the international insurance markets.

Section Ia (Material damage) represents a combined construction and erection all risks coverage and follows the same insurance principles as outlined under CAR/EAR. This section thus provides a very wide cover and is subject to only few standard exclusions. Compared with the traditional CAR/EAR covers this new CPI also provides cover, among other things, for

  • material consequential loss as a result of manufacturer’s fault
  • property belonging to or held in care, custody and control by the insured
  • professional fees, plans and documents
  • expediting expenses
  • off-site storage and inland transit.

The cover can further be tailored to the protection actually required by means of specific endorsements.

Section Ib (Plant, machinery and equipment) is based on the existing CPM policy, however, with the exception that it covers not only construction and erection machinery and plant but also the temporary equipment (e.g. camps, stores, scaffolding) installed at a construction or erection site and not only that belonging to the contractors but also to the insured employer.

In terms of Section II (Third party liability) coverage is provided for third party claims in respect of property damage or bodily injury arising in connection with the execution of a construction or erection project. This insurance section also contains a cross liability clause according to which the insurance applies to the insured parties named in Section 1a as if a separate policy had been issued to each party.

The main exclusions under this Section II are

  • loss of or damage to property insured under Sections Ia and Ib,
  • death of, bodily injury to or illness of any employee of the insured parties named in Section Ia,
  • consequential financial loss arising from loss of or damage to property belonging to or held in the care, custody or control of the insured parties named in Section Ia.

Section III ( Delay in start-up) indemnifies the insured employer for a loss of the interest insured as a result of delayed commencement of the business insured caused by an accident covered under Section Ia.

The interest insured is

  • the loss of gross profit actually sustained due to a reduction in turnover or
  • the standing charges not earned due to a reduction in turnover and
  • the increased cost of working, i.e. the additional expenditure necessary and reasonably incurred for avoiding or diminishing a reduction in turnover, revenue or rentals. This cover is advisable for all construction and erection projects provided that these projects are not considered to be of a prototype nature.

As far as the list of exclusions, the calculation of the sum insured and premium and the meaning of the terms time excess and indemnity period limit are concerned, the same insurance principles are applied as outlined under advance loss of gross profit (ALOP) insurance.

The comprehensive project insurance policy can be supplemented by a marine cargo cover, which provides indemnification to the insured for loss of or damage to the property insured or its delayed arrival in accordance with the Standard Institute Cargo Clauses widely used in the international marine market.

* These summaries are taken from Munich Re’s booklet Technical Insurance References and are based on the examples of Engineering Insurance wordings of Munich Re, but broadly apply in general to the classes of Engineering Insurance referred to herein.

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Updates and News

The topics of the IMIA Working Groups 2013 see under Events - Working Groups.

All papers published at the 2012 conference in Rio de Janeiro see under Library.

01.04.2013