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 2 Subject matter insured Contract works
CAR insurance may be concluded by CAR insurance can be taken out for all This term implies all the operations to
building and civil engineering projects, be carried out by a contractor and his
– the principal, such as subcontractors in compliance with the
building contract, including preparatory
– the contractors engaged in the project, – residential and office buildings, work on the site, such as excavation,
including all subcontractors. hospitals, schools, theatres, grading and levelling work, the execution
of temporary structures like diversion
In order to prevent overlaps or gaps in – factories, power plants, cuts and protective dams, as well as the
the cover provided, CAR insurance use of all the materials stored on the site
should be concluded for all parties – road and railway facilities, airports, which are to be incorporated in the
concerned. structure.
– bridges, dams, weirs, tunnels, water
supply and drainage systems, canals, The assembly or erection of machinery,
harbours. plants and steel structures may be
included under a CAR policy provided
In particular, the cover comprises the that their value, including erection costs,
following: 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.
4
Construction plant and equipment Costs of clearance of debris Surrounding property
This term implies workers’ This term implies the expenses incurred This term implies property located on the
accommodation, storage sheds, pre- for the removal of debris from the site in site as well as property surrounding the
paration and mixing plant, scaffolding, the event of a loss indemnifiable under site. A distinction is made, however,
utilities (electricity, water supply), etc. the CAR insurance. between property belonging to or held in
care, custody or control of persons
Construction machinery Third party liability
– named in the policy as the insured
This term implies earthmoving equip- This term implies legal liability arising out (if cover is only granted by way of an
ment, cranes and the like, as well as of property damage or bodily injury suf- endorsement)
site vehicles not licensed for use on fered by third parties and occurring in
public roads, regardless of whether such connection with the contract works. – who may be regarded as third parties
machinery is owned or hired by the However, the insurers will not indemnify for the purposes of the policy, ie persons
contractor. any claims from the insured’s employees who are neither the insurers nor the
or workmen who are connected with the insured (in this case indemnity is payable
construction project. according to the principles of third party
liability cover, section II of the CAR
policy).
View of a high-rise construction site.
Two high-rise buildings under construction (diameter
23 metres each).
5
3 Scope of cover As a rule, the following causes of loss
are indemnifiable under CAR insurance:
CAR insurance provides a very far-
reaching cover. This means that any – fire, lightning, explosion, crashing
sudden and unforeseen loss or damage aircraft, extinguishing water or other
occurring during the period of insurance fire-fighting measures,
to the property insured will be indem-
nified unless the loss or damage is due – flood, inundation, rain, snow,
to the few exclusions indicated explicitly avalanche, tsunami,
in the policy.
– windstorm of any kind,
Shotcrete lining of a tunnel section. – 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
6
The cover provided by CAR insurance is risks of strike and riot in special cases,
only subject to a few obvious exclusions but such an inclusion is subject to careful
which the international insurance market prior examination),
usually applies.
– loss or damage due to wilful act or
These exclusions are named in the wilful negligence of the insured or his
policy and essentially comprise: 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 of defective or inadequate material).
and/or electrical breakdown of However, loss or damage to correctly
construction machinery, plant and executed items resulting from the in-
equipment, ie loss or damage not adequacy of other items of the contract
caused by exterior influences (whereas works is generally covered under CAR
any physical loss or damage to the insurance.
building project resulting therefrom is
covered),
– 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 – safety factors considered in the
construction time schedule,
There is no established rating scheme
providing fixed premium rates for CAR – measures provided to ensure safe
insurance, since every building project execution of the project.
must be rated on its merits, taking into
acount the individual technical and local To be able to establish premium rates
conditions. Basically, the following factors which are commensurate with the risks
must be considered for proper risk involved, the insusers must be given the
assessment: opportunity of checking the building
contract, drawings, specifications,
– conditions on and exposure of the site construction time schedule, bill of
(atmospheric and tectonic conditions, quantities and schedule of prices as well
eg the probability of earthquakes, flood, as other relevant information. The more
inundation), complete the information given to
the insurers, the more accurate the
– design features and building materials, assessment of the risk will be, and the
more advantageous the premium for the
– construction techniques, insured.
A school building collapsed as a result of a If it is not possible to complete a project for the fact that part of the construction
seaquake. 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
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6 Indemnification in each individual case. The purpose of
such a deductible is to stimulate the
The insurers indemnify the insured for insured’s interest in loss prevention and
the expenses incurred for eliminating to relieve the insurers of the burden of
loss of or damage to the property in- dealing with the many minor losses
sured. However, expenses for rectifying where the administration expenses
deficiencies that would have been incurred would be excessive compared
incurred anyway – without the occur- with the indemnity. Usually, separate
rence of such loss or damage – are not deductibles are applied for the contract
indemnified. works, the construction plant and
equipment, and the construction
Moreover, a so-called deductible is machinery.
agreed on for each CAR insurance. This
is the share in each loss which the The limit of indemnity is always equal to
insured has to bear for his own account the sum insured unless a limit for each
and which is thus deducted from the and every loss and/or an aggregate limit
indemnity. The deductible varies for all losses occurring during the period
according to the type and size of a of insurance has been agreed.
building project and the hazards involved
Flooding destroyed the dam under construction.
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7 Maintenance period 7.1 Maintenance visits cover
Very often, the building contract provides The insurers’ liability during the
for a maintenance period of 12 months maintenance period is limited to loss or
after the completed structure has been damage caused by the insured in the
taken over. For this period, maintenance course of the operations carried out
cover may be granted under the CAR during the maintenance period for
policy. The following types of cover are the purpose of complying with the
available: 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.
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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).
