How Does Construction All Risk Insurance Work?

On May 22, 2017, two workers fell to their deaths from the 17th floor while working on the construction site of the Paradise Group. The rope of the metallic plank snapped.
A significant amount of planning and expertise is invested in any construction project. The most significant fear for those involved in the construction business is that accidents or disasters can strike anytime, resulting in crippling costs and even injury. It is indispensable for you to take adequate steps to ensure you are adequately covered against uncertainties.
Here, construction all risk insurance, also called contractors all-risk, can act as your saviour. The policy is primarily designed for builders or contractors who are working on different construction projects including construction, alteration, and refurbishment.

Key Takeaways

Fatal Site Risk Mitigation: Fatal accidents and structural collapses highlight the critical need for Contractor’s All Risk (CAR) insurance to handle unpredictable, high-cost catastrophes on construction sites.
Work-in-Progress Coverage Standard: CAR insurance covers project works from storage and transit to erection, construction, and final handover to the principal, provided civil work accounts for over 50% of the contract value.
Sum Insured Calculation Method: Sum insured should reflect the full replacement cost of the largest project under management, factoring in total contract value, raw materials, labor costs, and surveyor/architect fees.
Compulsory Deductible / Excess: All CAR policies carry a compulsory excess, meaning the contractor must pay a pre-determined initial amount of any claim out of pocket before insurer payouts begin.
Pre-Existing Property Exclusion: Standard CAR insurance covers only new “work in progress” and temporary structures; pre-existing buildings on or around the site require a separate property insurance policy.

The policy is designed to cover ‘work in progress’, and the best part of contractors all risk insurance policy is the contract work section which gives cover for the property being worked on, like a new house, renovations, etc. The construction all risk insurance policy covers civil engineering projects in which the value of the civil work is more than the 50% of the total contract cost. The coverage includes works during storage, erection/construction until the completion and handling of the work to the principal.
A construction all-risk insurance policy is subject to a compulsory excess, which means that at the time of the claim, a policyholder must pay a certain portion of the loss before the insurer covers the remaining.
However, the policy doesn’t cover existing property, and therefore, it is essential for the owner to buy a separate insurance policy to get its current property covered. Similarly, no coverage would be given in case of loss or damage due to war, invasion, nuclear reaction, inventory losses, willful act, negligence, etc.
A quick look at the coverage available under construction all risk insurance policy:

Coverage is given for losses or damages to permanent and temporary works and materials, while in transit to and from the construction site
Coverage is available for both the owned and hired Plant and Equipment.

As per your needs, you can pay the extra premium and get the following coverages:

Provision for escalation
Clearance and removal of debris
Additional custom duty
Additional rate for air freight
Construction plants and equipment
Loss due to breakage of glass
Storage rate at fabricators’ premises/workshop

How Do You Choose the Level of Coverage Under Construction All Risk Insurance Policy?

While computing the right level of coverage, make sure that you consider the cost of your biggest contract on which you are working on, irrespective of the fact how long it will take you to complete the project. For instance, if your biggest project is Rs 1 crore contract, spanning over four years, make sure you are at least covered for Rs 1 crore plus labour and materials.
Read more: Risks You Should Consider While Running Construction Business

Other Considerations

While deciding the cover, you can also consider adding extra cover for any temporary work on your construction site, such as site office, temporary roads, toilets, etc. Similarly, if you have hired a plant & machinery, check to find the need of insuring it as well. It is essential to check the ‘key facts’ and to be certain of the security measures which need to be implemented on the construction site. A typical construction all risk insurance policy can also include a maintenance period to cover the duration between once the buildings are complete and when they are sold.

Summary Table: Work-in-Progress & Equipment Protection in CAR Insurance

Parameter	Policy Provisions & Scope	Operational & Financial Value	Practical Implementation Rules
Eligible Civil Projects	Civil engineering works where civil construction value exceeds 50% of total contract cost.	Covers new structures, renovations, alterations, and site work from storage to final principal handover.	Sum insured must match total replacement value, including material, labor, and consultant fees.
Transit & Temporary Assets	Materials in transit, site offices, temporary access roads, and temporary utility setups.	Prevents site interruptions caused by damage to peripheral setup and logistical supply chains.	Optional extensions must be chosen to cover temporary assets and off-site workshop storage.
Plant & Machinery (Owned/Hired)	Owned construction plant and hired machinery/equipment used at the project site.	Shields builders from high replacement or repair costs for heavy earthmoving and hoisting machinery.	Deductibles apply; hired gear requires verification of contractual insurance obligations.
Critical Policy Exclusions	Pre-existing structures, war, nuclear hazards, inventory shortages, and willful negligence.	Defines clear risk boundaries between new contract works and existing real estate assets.	Developers must procure separate property insurance to protect adjacent pre-existing buildings.

Conclusion

Remember, a construction all-risk insurance policy offers all-risk cover to your contract work, plant & machinery and temporary buildings for which you may be legally responsible, usually while working on the specific construction project. So, go with a sufficient sum insured, which should be the replacement cost and comprise of the cost of debris removal along with architect/surveyors’ fees also.

Frequently Asked Questions (FAQs)

1. What types of projects qualify for Contractor’s All Risk (CAR) insurance?

A) Contractor’s All Risk (CAR) insurance is tailored for civil engineering and building projects-including new construction, alterations, and refurbishments-where the value of the civil work constitutes more than 50% of the total contract value.

2. How should a builder calculate the ideal Sum Insured for a CAR policy?

A) The Sum Insured for a CAR policy should equal the total replacement value of the contractor’s largest active project. This calculation must include the full contract value, cost of raw materials, labor expenses, site clearance/debris removal costs, and professional architect or engineering fees.

3. Does a CAR insurance policy cover existing structures on the construction site?

A) No, standard CAR policies explicitly exclude pre-existing structures and properties on the site. CAR policies cover only new work in progress, temporary structures, and materials. Project owners must purchase separate property damage or existing building insurance to cover pre-existing assets.

4. Are hired plants and machinery covered under a Contractor’s All Risk policy?

A) Hired plant and machinery can be covered under a CAR policy, provided the policy explicitly includes a Construction Plant and Machinery (CPM) extension or endorsement covering both owned and rented equipment used on site.

5. What optional riders enhance financial protection under a CAR policy?

A) Essential CAR policy riders include Escalation Cover (to account for material price inflation), Debris Removal Extension, Air Freight/Express Freight Cover, Custom Duty Extensions, and Off-Site Storage Extensions for materials stored at fabricator workshops.

About The Author

Pankaj

MBA Insurance and Risk

With seven years of expertise in the insurance sector, Pankaj is a seasoned authority in Construction All Risk (CAR) insurance. As a dedicated contributor to SecureNow’s blog and article platform, they adeptly unpack the intricacies of CAR policies. He is deeply committed to empowering construction professionals with comprehensive insights into risk mitigation and coverage nuances. Their proficiency in navigating insurance landscapes ensures readers receive current and actionable guidance. Pankaj‘s passion for fostering understanding and resilience within the construction industry has firmly established them as a trusted source of knowledge and support.