Monday, December 12, 2011

Contractor’s All Risk Policy (or CAR Policy)

Construction projects generally involve countless risks, minor to major, which could lead to serious financial loss to any or all of the stakeholders of the project. Some of them could even lead to the premature termination of the project also. Theft, accident, fire, riot, negligence, loss, burglary, and damage to equipments and machinery are some of the major risks associated with construction projects, to list a few.
To prevent such major financial loss, and to transfer the risk from the project stakeholders, insuring the project wholly or partially is considered as one of the primary options. Insurance of works is nothing other than a form of risk management, by which we transfer the risk from one entity to other, through exchange of payment.
In conventional way, the term insurance in construction industry generally constitutes either or all of the following.

• Insurance of works,
• Third Party insurance,
• Accident or injury to workmen.

These can either be taken separately, by either contractor or client based on the contractual terms and conditions, or can be taken in the form of Contractor’s All Risk Policy, widely known as CAR policy, covering all potential risks.

CAR Policy
CAR policy, as its name indicates, covers all risks associated with construction projects. All rules, regulations, advantages, terms and conditions etc for Contractor’s All Risk Insurance business is directed by the provisions of Part II B of the Indian Insurance Act 1938.
CAR is usually taken commonly under the joint names of the Contractor and Client for a stipulated time period, and usually includes public liability insurance also. However, this can be taken by the Client and Contractor separately or jointly. In case if Client is taking the policy, he can, at his discretion, deduct the premium from all the contractors for the project at pro-rata basis to the value of the respective contract.

Basic structure:

Generally a CAR policy includes two parts.

Part-1: Material Damage - covering physical loss, damage or destruction of the property insured by any cause, other than those specifically excluded in the policy.
Part-II: Third Party Liability – to cover the legal liability of the contractor against bodily injury or property damage belonging to a third party.

In addition to the above, CAR policy can be extended to cover other risks like,
  • Damages to surrounding properties.
  • Damages during maintenance or defect liability period.
  • Damages to scaffolding and other shuttering materials etc.
  • Earthquake.
  • Damages, delay or other risks associated with air freight.
  • Risk of additional customs duty.
  • Storage risk at Fabricator's Premises.
  • Risk of breakage of glasses.
  • Cover during defect liability period.
However, damages due to the following are generally excluded from the insurance scope.

  • Faulty design.
  • Rectification of aesthetic defects of structure – if not related to any physical loss or damage to the structure, due to any accident, or of material defect or of workmanship defect.
  • Loss or damage due to gradual deterioration, atmospheric condition, rusting etc.
  • Loss discovered only at the time of taking inventory.
  • Loss arising out of penalty for delay, non-fulfillment of terms of contract.
 Insured sum:
The amount insured is calculated separately for part-I and part-II.
For part-I, the sum insured shall at least be equal to the contract sum, if insurance is taken by the contractor, or full value of the completed project on completion of construction, if the policy is taken by the Client. Typically, the sum include any or all of the following, based on the project/ client requirement.
The value of the contract, including the labour charges and cost of materials, but excluding the profit.
  • The value of the materials supplied directly by the client.
  • Value of expected escalation to the contract – for long term contracts.
  • Cost of cleaning & removal of debris from site.
  • Expected escalation of rates during the period of construction.
  • Expected protection to Owner's surrounding property.
  • Cost of plant, machinery, tools and material handling equipments.
For part-II, ie for third party liability, the sum insured generally being represented on ‘per accident’ basis, and the limit per policy period is estimated taking into account the maximum number of such accidents which can reasonably be expected to occur during the tenure of the project. The sum insured will be for all the accidents together during the policy period, specifying the maximum liability for one accident.

Period of policy:
Unlike other policies where the period of insurance is usually one year, CAR policy has the period of insurance equivalent to the period of contract, commencing from the date of unloading of the first batch of material at the site of construction and expiring on the date of handing over of the contract work to the principal. However, the policy period can even be extended to the end of defect liability period.

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8 comments:

Unknown said...

Civil contractor in india
Thanks for sharing, Hope this helps many! Keep sharing....

Anonymous said...

really helpfulll

pradhan said...

really helpfulll

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Unknown said...

CAR Policy is really an essential thing for construction industries since a Civil contractor has to put in anticipation some unforeseen occurrence while construction is on-going. What I like most is its period of policy since the insurance period is equivalent to the period of contract. Thus, precautionary step will be taken in consideration with the project.

Arconex India said...

Thanks for the concise summary of the issue!

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