Contractors’ All Risks

Insurance

Münchener Rück
Munich Re
Contractors’ All Risks
Insurance

A publication
of the Munich Reinsurance Company
This publication was conceived, written
and realized in terms of both graphic
design and typography exclusively by
Munich Re staff.

© 1996
Münchener Rückversicherungs-
Gesellschaft
Address for letters:
D-80791 München
Germany

Order number 0001-E-e/154.1

The paper used for this brochure was

produced without chlorine bleaching.
Introduction Therefore, there is an increasing
tendency on the part of principals,
Contractors’ All Risks (CAR) insurance consulting engineers, architects and
is – like Erection All Risks insurance – a financiers to make the conclusion of a
relatively modern branch of engineering CAR policy a condition for the award of a
insurance. The basic concept of CAR tender. For quite some time, this has also
insurance is to offer comprehensive and been a condition stipulated in many
adequate protection against loss or contracts involving government projects.
damage in respect of the contract works,
construction plant and equipment and/or Munich Re has played an important part
construction machinery, as well as for in the development of CAR insurance
third party claims in respect of property and its application. Munich Re always
damage or bodily injury arising in endeavours to assist its ceding com-
connection with the execution of a panies in all questions relating to this
building project. increasingly important and difficult class
of business. For this purpose, the
The rapid development of technology, services of a team of qualified civil
which has also occurred in the field of engineers are available at any time to
construction, the enhanced demand for assist the companies in the rating of
construction work of any kind, the growth CAR insurance, the inspection of
in the values of individual building projects during construction and the
projects, and the ensuing increase of the settlement of claims.
technical and economic risks during
construction, have resulted in an ever-
increasing demand for CAR insurance
protection all over the world. In addition,
owing to increasingly keen competition,
contracting firms are frequently not in a
position to include in their tender prices
a sufficient margin for the hazards in-
volved. Since an insurance premium can
be calculated much more accurately by a
professional insurer than the hazard
margin by a contractor, CAR insurance
contributes to reducing the overall
construction expenses and at the same
time offers efficient financial protection
for all parties concerned.

Erecting a high-rise building using the steel skeleton

construction method.

3
1 Insured
CAR insurance may be concluded by
– the principal,
– the contractors engaged in the project,
including all subcontractors.
In order to prevent overlaps or gaps in
the cover provided, CAR insurance
should be concluded for all parties
concerned.
4
2 Subject matter insured
CAR insurance can be taken out for all
building and civil engineering projects,
such as
– residential and office buildings,
hospitals, schools, theatres,
– factories, power plants,
– road and railway facilities, airports,
– bridges, dams, weirs, tunnels, water
supply and drainage systems, canals,
harbours.
In particular, the cover comprises the
following:
Contract works
This term implies all the operations to
be carried out by a contractor and his
subcontractors in compliance with the
building contract, including preparatory
work on the site, such as excavation,
grading and levelling work, the execution
of temporary structures like diversion
cuts and protective dams, as well as the
use of all the materials stored on the site
which are to be incorporated in the
structure.
The assembly or erection of machinery,
plants and steel structures may be
included under a CAR policy provided
that their value, including erection costs,
is less than 50 % of the total sum
insured.
Construction pit for a high-rise building.
Carcass of a high-rise building shortly before
completion.
Construction plant and equipment
This term implies workers’
accommodation, storage sheds, pre-
paration and mixing plant, scaffolding,
utilities (electricity, water supply), etc.
Construction machinery
This term implies earthmoving equip-
ment, cranes and the like, as well as
site vehicles not licensed for use on
public roads, regardless of whether such
machinery is owned or hired by the
contractor.
View of a high-rise construction site.
Two high-rise buildings under construction (diameter
23 metres each).
Costs of clearance of debris
This term implies the expenses incurred
for the removal of debris from the site in
the event of a loss indemnifiable under
the CAR insurance.
Third party liability
This term implies legal liability arising out
of property damage or bodily injury suf-
fered by third parties and occurring in
connection with the contract works.
However, the insurers will not indemnify
any claims from the insured’s employees
or workmen who are connected with the
construction project.
Surrounding property
This term implies property located on the
site as well as property surrounding the
site. A distinction is made, however,
between property belonging to or held in
care, custody or control of persons
– named in the policy as the insured
(if cover is only granted by way of an
endorsement)
– who may be regarded as third parties
for the purposes of the policy, ie persons
who are neither the insurers nor the
insured (in this case indemnity is payable
according to the principles of third party
liability cover, section II of the CAR
policy).
5
3 Scope of cover
CAR insurance provides a very far-
reaching cover. This means that any
sudden and unforeseen loss or damage
occurring during the period of insurance
to the property insured will be indem-
nified unless the loss or damage is due
to the few exclusions indicated explicitly
in the policy.
Shotcrete lining of a tunnel section.
6
As a rule, the following causes of loss
are indemnifiable under CAR insurance:
– fire, lightning, explosion, crashing
aircraft, extinguishing water or other
fire-fighting measures,
– flood, inundation, rain, snow,
avalanche, tsunami,
– windstorm of any kind,
– earthquake, subsidence, landslide, occurring during on-site transportation,
rockslide, intermediate storage, or during assembly
or disassembly.
– theft, burglary,
– bad workmanship, lack of skill,
negligence, malicious acts or human
error.
CAR insurance can also cover loss,
damage or destruction of building
material, construction machinery and
construction plant and equipment even
The cover provided by CAR insurance is
only subject to a few obvious exclusions
which the international insurance market
usually applies.
These exclusions are named in the
policy and essentially comprise:
risks of strike and riot in special cases,
but such an inclusion is subject to careful
prior examination),
– loss or damage due to wilful act or
wilful negligence of the insured or his
representatives,

– loss or damage due to military – loss or damage due to nuclear reaction,

measures, war or warlike operations,
strike, riot, civil commotion, cessation of – deficiencies in the contract works or
work, requisition by order of any public other financial losses, claims from
authority (it is possible to include the penalties,

Tunnel dredger in operation.
– loss or damage due to mechanical
and/or electrical breakdown of
construction machinery, plant and
equipment, ie loss or damage not
caused by exterior influences (whereas
any physical loss or damage to the
building project resulting therefrom is
covered),
of defective or inadequate material).
However, loss or damage to correctly
executed items resulting from the in-
adequacy of other items of the contract
works is generally covered under CAR
insurance.

– loss or damage due to faulty design,

– the cost of rectification of any de-

ficiencies in the contract works (eg use

7
4 Period of cover

The cover attaches as from the com-

mencement of work or after the insured
items have been unloaded at the site and
terminates when the completed structure
is taken over or put in service. The
insurers’ liability for construction
machinery and construction plant and
equipment commences from their un-
loading at the site and expires on their
removal therefrom. In addition, it is
possible to extend the period of cover to
include a maintenance period (cf item 7).

Cantilever of a stayed girder bridge.

8
5 Calculation of sum insured and
premium

5.1 Sum insured

The sum insured must be equal to the

amount stated in the building contract,
plus the value of any construction
material supplied and/or additional work
performed by the principal. Any increase
in the contract sum must be notified
immediately to the insurers in order to
avoid underinsurance. If it is found out at
the end of the construction period that
the sum insured has increased, a
supplementary premium must be
charged.

In the case of fixed-price contracts, the

sum insured will not be increased when
material and labour costs rise, although
the repair expenses will of course be
higher in the event of a loss. This Road destroyed by flooding.
problem can only be solved by applying
adequate premium rates and deduct-
ibles.

Usually, separate sums insured are fixed

for:

– construction machinery and con-

struction plant and equipment (the
relevant sums insured must be equal to
the replacement values applicable when
the contract is concluded, including
freight, erection cost and customs
duties),

– existing buildings and clearance of

debris (in this connection it is essential
that the respective sums insured are
adequate).

Third party liability cover is likewise

subject to a separate limit of indemnity
for any one accident.
Flooding destroyed 39 kilometres of pipeline.
Catastrophe risks (earthquake, flood,
inundation, windstorm of any kind)
require special care and attention with a
view to the likelihood of accumulation.
For these risks separate limits of
indemnity must be fixed, so that the
insurers’ liability does not increase
indefinitely.

View of a hydroelectric plant under construction.

9
5.2 Premium
There is no established rating scheme
providing fixed premium rates for CAR
insurance, since every building project
must be rated on its merits, taking into
acount the individual technical and local
conditions. Basically, the following factors
must be considered for proper risk
assessment:
– conditions on and exposure of the site
(atmospheric and tectonic conditions,
eg the probability of earthquakes, flood,
inundation),
– design features and building materials,
– construction techniques,
A school building collapsed as a result of a
seaquake.
10
– safety factors considered in the
construction time schedule,
– measures provided to ensure safe
execution of the project.
To be able to establish premium rates
which are commensurate with the risks
involved, the insusers must be given the
opportunity of checking the building
contract, drawings, specifications,
construction time schedule, bill of
quantities and schedule of prices as well
as other relevant information. The more
complete the information given to
the insurers, the more accurate the
assessment of the risk will be, and the
more advantageous the premium for the
insured.
If it is not possible to complete a project for the fact that part of the construction
within the policy period, the insurance machinery is not used on the site
may be extended, subject to the payment throughout the construction period.
of an additional premium. However, the
relevant extension premium should not
be fixed until shortly before the expiry of
the original policy period, so that any
special circumstances prevailing at the
time may be taken into consideration.
The premium rates for construction plant
and equipment are charged either for the
entire policy period or on an annual
basis. The rates for construction ma-
chinery are usually fixed on an annual
basis. These rates are average rates
and, as a rule, allowance has been made
6 Indemnification
The insurers indemnify the insured for
the expenses incurred for eliminating
loss of or damage to the property in-
sured. However, expenses for rectifying
deficiencies that would have been
incurred anyway – without the occur-
rence of such loss or damage – are not
indemnified.
Moreover, a so-called deductible is
agreed on for each CAR insurance. This
is the share in each loss which the
insured has to bear for his own account
and which is thus deducted from the
indemnity. The deductible varies
according to the type and size of a
building project and the hazards involved
in each individual case. The purpose of
such a deductible is to stimulate the
insured’s interest in loss prevention and
to relieve the insurers of the burden of
dealing with the many minor losses
where the administration expenses
incurred would be excessive compared
with the indemnity. Usually, separate
deductibles are applied for the contract
works, the construction plant and
equipment, and the construction
machinery.
The limit of indemnity is always equal to
the sum insured unless a limit for each
and every loss and/or an aggregate limit
for all losses occurring during the period
of insurance has been agreed.
Flooding destroyed the dam under construction.
11
7 Maintenance period
Very often, the building contract provides
for a maintenance period of 12 months
after the completed structure has been
taken over. For this period, maintenance
cover may be granted under the CAR
policy. The following types of cover are
available:
12
7.1 Maintenance visits cover
The insurers’ liability during the
maintenance period is limited to loss or
damage caused by the insured in the
course of the operations carried out
during the maintenance period for
the purpose of complying with the
obligations under the maintenance
provisions of the contract.
7.2 Extended maintenance cover
In addition to the protection provided
under the maintenance visits cover,
this type of cover also includes loss or
damage caused during the erection
period.
Cantilever of an arch bridge.
Sources of illustrations:

Allianz (8); Hochtief AG (4);

Ph. Holzmann (7); Minami Nippon
Shimbun (9); Munich Re (3, 4, 9, 10);
Paisajes Españoles (11); Wayss &
Freytag (6); Züblin (12).