What it means
Construction sites concentrate risk in an unusual way. Half-finished structures stand open to the weather, expensive plant is parked in the mud, materials are stacked where they can be stolen, and members of the public walk past the hoarding every day.
CAR policies are usually written in two parts. Section one covers material damage to the permanent and temporary works, plus plant, equipment and materials on site, while section two covers third-party liability for injury or property damage arising out of the contract works.
The sum insured for the works is normally the full contract value, including any materials the client supplies free of charge, because understating it triggers averaging. Under averaging the insurer pays only the proportion of a claim that the declared value bears to the true value, so a 20% shortfall in the declared sum can cut a settlement by 20%.
Standard exclusions matter more than the headline cover. Defective design and workmanship, ordinary wear and tear, consequential losses such as damages for late completion, and war or nuclear risks are typically excluded unless specific extensions have been bought and paid for.
Most construction contracts state who must arrange CAR cover and for how long. Cover normally runs from site possession through to practical completion, with a maintenance or defects liability period added so that damage caused while returning to fix snags is still covered.
In practice
Real-world examples.
Example
A groundworks contractor building a supermarket car park has three weeks of newly laid sub-base washed out by an exceptional storm. The reinstatement cost is $180,000, and because storm damage to the works is covered, the CAR policy pays the amount above the excess and the contractor only loses the time.
Example
A tower crane on a city centre site drops a load of formwork onto a neighbouring shop roof. The repair and business interruption claim from the shop owner is handled under the third-party liability section of the CAR policy rather than the contractor's separate professional indemnity cover.
Example
A client insists in the building contract that CAR cover be arranged in joint names and remain in force for a twelve-month defects liability period. When a contractor returns to replace faulty door closers and damages a finished floor, the claim is still within the policy period because of that extension.
Formula
Calculation
Premium = (contract value x works rate) + (declared plant value x plant rate). A claim then pays out as the loss amount minus the policy excess.
A contractor is building a $12,000,000 distribution warehouse over eighteen months. The insurer quotes a works rate of 0.25% of contract value, plus a separate rate of 1.2% on $500,000 of declared plant and equipment.
The works premium is 0.0025 x $12,000,000 = $30,000. The plant premium is 0.012 x $500,000 = $6,000. Total premium for the project is $30,000 + $6,000 = $36,000, which works out at 0.3% of contract value because $36,000 / $12,000,000 = 0.003.
Six months into the build, a fire destroys $450,000 of partly completed steelwork and stored cladding. With a policy excess of $25,000 per claim, the insurer pays $450,000 - $25,000 = $425,000. The contractor absorbs the $25,000 excess and also carries the cost of the delay to the programme, which the material damage section does not cover.Case study
Seen in the real world.
Thornbury Civils is a fictional contractor invented purely to illustrate how CAR cover behaves in practice. It wins a $9,000,000 bridge refurbishment and, keen to keep the bid competitive, declares a works value of $7,200,000 on the basis that the client is supplying $1,800,000 of steel free of charge.
Eight months later, floodwater damages falsework and stored materials with a reinstatement cost of $500,000. The insurer applies averaging, because the declared value of $7,200,000 is only 80% of the true $9,000,000 at risk, so it pays 80% of the claim less the $20,000 excess. The settlement comes to 0.80 x $500,000 = $400,000, minus $20,000, leaving $380,000 against a $500,000 loss.
Thornbury absorbs the $120,000 shortfall to protect a client relationship that was not at fault. The illustrative lesson is that the small saving from understating a sum insured is dwarfed by the cost of averaging when a genuine claim arrives.
Watch out
Common mistakes.
- Declaring only the contractor's own scope as the sum insured. Free-issue materials and client-supplied equipment sit on site and are at risk, so leaving them out invites averaging on any claim.
- Assuming CAR covers bad workmanship. Standard policies exclude the cost of putting right defective work, and only cover resulting damage to other parts of the works if the appropriate extension has been bought.
- Letting cover lapse at practical completion. Snagging visits, commissioning and the defects liability period all carry real risk, and the maintenance extension exists precisely for that window.
Questions
People also ask.
Who normally pays for CAR insurance?
It depends on the building contract, but on most commercial projects the main contractor arranges it in joint names and recovers the premium within the contract price.
Does CAR insurance cover delay to the programme?
Not under the standard material damage section, since consequential loss is excluded, and a separate delay in start-up or advance loss of profits policy is required.
How is the premium usually rated?
As a percentage of contract value adjusted for project type, duration, site conditions and claims history, with plant and equipment rated separately at replacement cost.
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