Contractors' all risk policy is designed to provide comprehensive cover to the construction plant and machinery, and equipment against perils that could arise during the construction process. CAR policy also covers third-party claims arising out of bodily injury as well as property damage during the execution of civil engineering projects. As the name suggests it is an all-risk policy which means that all the risks are covered except for those excluded under the policy.
CAR policy has two sections; one is the material damage section which covers the damage, or destruction of property due to any insured peril arising during the construction phase or testing phase and the other one is the third party liability section which covers the bodily injury or property damage. CAR policy covers only the third-party liabilities and not the bodily injury to the own employees working on behalf of or for the insured in any manner.
How is the Premium Calculated in the Construction All Risk Policy?
- Project cost: The most important thing that decides the premium to be paid in Contractors all risk insurance policy is the project cost. Project cost is the total cost incurred to construct the project which was quoted by the contractor. For example, the project cost could be estimated to be Rs.15 Crore and the final cost could be more or less than the estimated project cost. For this reason, the project cost is the cost that is mentioned in the estimate given by the contractor. Project cost is taken as the base while calculating the premium in a contractor's all risk insurance policy. The higher the project cost, the higher would be the premium charged in a CAR policy. It is necessary to show the tender or the final estimate given by the contractor to arrive at the project cost in the CAR policy.
- Sum Insured: The sum insured is the maximum liability of the insurance company at the time of claim settlement. The sum insured could be more than the project cost which includes other amounts such as freight cost, custom duties, and escalation of project cost, etc. All these could increase the sum insured making it more than the project cost and therefore the sum insured could sometimes be greater than the project cost in a contractor's all risk insurance policy. The sum insured also includes the add-ons sum insured which do not come under the project cost. The sum insured should include the total value of the contract work, the value of the material supplied, the cost of cleaning debris, the expected escalation of the contract, etc.
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- Nature of the project: The nature of the project also determines the premium under the CAR policy. The nature of the civil work decides the premium to be paid by the insured. The premium for residential and commercial buildings would be less than that of roads and flyovers. There are various civil works that are covered in a CAR policy such as:
- Residential buildings like houses, commercial buildings such as shopping malls, multiplexes, cinema theaters, etc.
- Factory buildings, warehouses, and goods storage units.
- Roads, Bridges, flyovers, runways
- Irrigation projects and canals
- Tunnels, dams, and reservoirs
- Interior decoration works
- A combination of the above
4. Project period: The project period is the time taken to finish the project. The project period starts from the day of unloading the raw materials at the construction site and ends after the testing phase is over and the project is handed over to the customer. For this reason, the project period is not fixed in a CAR policy even though there is an estimation period for project completion. The project completion period mentioned in the agreement is taken as the project period and based on this the premium is calculated.
The biggest advantage of a CAR policy is that the policy period can be extended as that of the project period. If the project period is extended then the policy period can also be extended on payment of additional premium. At first, the project period mentioned in the agreement would become the policy period and the basis for the calculation of the premium. It is important to note that CAR policy can be given for as less as 1 month and there is no upper limit on the construction period.
5. Geographic location: The geographic location of the project also plays an important role in the premium calculation. If the project is located close to water bodies or hilly areas then the premium charged could be higher as the risk in these areas is higher than that of plain areas. For example, water bodies can cause inundation resulting in damage to the materials whereas hilly areas could have landslides and rockslides which could also damage the materials at the insured site.
For this reason, areas that have higher exposure to natural calamities attract higher premiums. Construction projects located in seismic zones also attract higher premiums as these locations have higher chances of earthquakes resulting in complete damage to the construction property. There are 4 zones in India that are classified based on the seismic activities in those zones. For instance, the Northeast and some parts of Uttar Pradesh and Bihar have higher chances of occurrence of earthquakes due to their vicinity to the Himalayas.
6. Machinery used: Construction requires machinery to be used and this machinery can either be insured under the Contractor's all risk insurance policy or the Contractors plant and machinery policy. It is important to note that there is certain equipment that cannot be carried around so easily and these are covered in any of the above-mentioned policies.
If the machinery is covered in the construction all risk insurance policy then the premium would be charged separately for the sum insured of the machinery. Machinery used in construction includes Cranes, JCBs, Bulldozers, etc. which may cause property damage or third-party bodily injury or property damage resulting in claims.
7. Period of testing: CAR policy is divided into the construction phase and testing phase. The construction phase is when the construction takes place whereas the testing phase includes the testing of the structure or equipment at the insured site. The period of testing would also be mentioned in the agreement and decides the premium to be paid by the insured. It is important to note that there are higher chances of claim occurrence in the testing phase than in the construction phase, so the premium charged for the testing phase is high. The longer the testing period, the higher could be the premium. The testing period varies from one civil work to another. For example, the testing period for residential buildings could be less than that of a flyover.
How to Choose Sum Insured in the CAR policy?
- Cost of imported & indigenous materials: The cost of imported or indigenous materials as well as machines that ought to be used for the construction should be included in the sum insured calculation. The sum insured consists of the value of the materials that are used for construction, both imported as well as indigenous. Construction involves the usage of machines and these machines would normally be insured under the CAR policy therefore the sum insured of these machines should be included in a separate section in the CAR policy.
- Sum Insured - There is a provision to mention the sum insured of the machines used at the construction site in the CAR policy under the name Contractors plant and machinery. Even though contractor plant and machinery cover exists as a stand-alone policy in the market, it is being offered as an add-on/ a separate section in the contractors all risk insurance policy. The cost of the materials that are to be used for the construction should be included in the sum insured section of the policy and the cost of the materials should also be included in the construction agreement.
- Freight charges: There could be freight charges such as Ocean freight and Air freight etc., which could be spent on transporting the machinery or the materials to the construction site and these charges are to be added to the sum insured under a contractor's all risk insurance policy. It is not a mandatory requirement that every construction would have freight charges, but if a construction involves freight charges then it should definitely be added to the sum insured. Otherwise, the sum insured would not be representative of the whole. There might be instances where the project cost might not be representative of the entire sum insured as the project cost might fail to take into consideration the freight charges that could be incurred by the insured. Freight charges are not uncommon in the construction sector as there are machines and materials which are being imported from abroad and the import of tiles from Italy for a Housing project could be an example of this.
- Custom duties: When there are imported components, materials or machinery to be used for construction purposes, then there would arise the need to pay customs duties for those components. The custom duty depends on the type of component and varies from one location to another. The sum insured of a contractor's all risk policy should contain the custom duties that could be incurred by the insured during the policy period. There could be an estimation of the customs duty that could be incurred by the insured. This estimation could be in terms of the percentage of the sum insured under the contractor's all risk insurance policy. The addition of custom duty to the sum insured in a CAR policy increases the sum insured under the policy making it an appropriate representation of the sum insured of the policy.
- Cost of construction: The cost of construction includes the labor cost and other miscellaneous expenses such as rental expenses on hired machinery, electricity expenses at the construction site, water expenses, etc. All these expenses amount to the cost of construction and are to be definitely included in the sum insured under a contractor's all risk insurance policy. The cost of construction would also include the cost of setting up temporary structures at the construction site in order to facilitate the construction of civil structures which are then dismantled after the construction of the civil structure. There could also be permanent civil engineering works that do not come under the purview of the buildings constructed such as the boiler house, powerhouse, godowns, etc. These permanent civil engineering works would remain after the construction of the main building and are to be included in the sum insured section. There is a separate section under which these structures should be included in a contractor's all risk insurance policy.
- Escalated amount: Contractors' all risk insurance policy has a provision to accommodate the increase in the cost of construction due to whatsoever reason. The cost of construction could increase due to various reasons such as stalling of work due to strikes, increase in raw material costs, etc. and this issue could be addressed in the contractors all risk policy. CAR policy has a provision to opt for escalation in the sum insured to take care of unexpected escalations of the sum insured during the policy period. For example, if you opt for a 10% escalation of the sum insured on an estimated project cost of Rs.100 Crores, then the escalation sum insured would come to Rs.10 Crores which comes into play only if there is an escalation during the policy period. There are certainly other expenses such as consultant fees, soil testing expenses, leveling expenses, etc., also known as pre-operating expenses which should not be included in the sum insured section.
- Risk Assessment in CAR policy: Risk assessment in a CAR policy is done by the underwriting team of the insurance company before arriving at the premium calculator process. The risk assessment is carried out to decide the underwritability of the proposal. If the assessment is satisfactory i.e. it satisfies the conditions mentioned by the insurance company, then the proposal would be underwritten by the insurance company and the discounts would be given based on the measures taken by the insured to mitigate the risk. Here are the factors that are considered for the risk assessment while underwriting a construction all risk policy:-
- Risk exposure of construction site: Risk exposure at the construction site will be an important factor in the risk assessment process. For instance, construction sites that have high exposure to water bodies or natural calamities are considered a poor quality risk and are not underwritten, if underwritten they are charged a high premium as the chance of occurrence of loss is high in these areas. For example, a CAR policy might be rejected if the construction activity is being carried out in the middle of an ocean or on a hill. The reason behind this is that in those areas where the occurrence of loss is high, the quantum of loss could also be high in some cases. For instance, if there is a flood at the construction site, it could result in total loss thereby making such risks undesirable to the insurance companies.
- Contractor’s experience: The other important factor that is considered for risk assessment in a CAR policy is the contractor’s experience. An experienced contractor with a lower loss ratio could get a better rating than one with frequent losses or claims. The experience of the contractors plays an important role because the contractor knows how to handle the risks arising during the construction period. A novice contractor may not know the trades of the work and may not be able to prevent the occurrence of loss or reduce the damage in case of peril. Contractor experience is also decided by the previous contracts executed by that contractor.
- Techniques & materials used: The techniques and materials used at the construction site play an important role in risk assessment. Robust techniques and quality materials score higher in the risk assessment making it a favorable proposal. For instance, if low-quality materials are used in the construction process, they could collapse even for a small peril and have to be covered by the insurer. For this reason, the quality of materials used would also be taken into consideration to determine the risk posed by the proposal. There are various advanced techniques that could reduce the risk at the construction site, particularly when it involves working with water bodies or in hilly areas. Such techniques would score high in the risk assessment and the underwriters would be willing to underwrite the proposal at favorable rates.
- Construction time and safety features: The time taken for the construction and the safety features employed by the contractor are also considered in the risk assessment. If the construction time is high or if the project is delayed without valid reasons, then the insurer might not be willing to underwrite the proposal or provide an extension. In the same way, if proper safety features are established at the construction site, it could reduce the occurrence of loss and make it a good risk.
FAQs in Construction All Risk Policy:
- How to reduce the premium in Construction all risk policy?
Premium in construction all risk policy depends on various factors such as the type of construction, materials used, risk exposure at the construction site, safety features employed at the site, quality of materials used, etc. The premium could be decreased by employing the best practices at the construction site and scoring high in the risk assessment carried out by the insurer.
2. What factors influence the premium in a CAR policy?
The main factor that influences the premium in a CAR policy is the sum insured under the policy. The higher the sum insured, the higher would be the premium. The other factors that influence the sum insured are the nature of the construction work, the project period, and the geographic location of the project. The geographic location consists of the seismic activities and proximity to water bodies. The higher the risk of earthquakes and proximity to water bodies, the higher would be the premium in a CAR policy.
3. What is Wet risk in a CAR policy?
Wet risk is defined as any project work in which more than 35% of its construction value is in a permanent water body or is below the high water mark of any tidal body. Wet risk consists of contracts involving work in rivers, lakes, or seas.
4. Does CAR policy cover bodily injury to employees?
No. CAR policy doesn't cover bodily injury to the employees of the contractor. The policy covers bodily injury to only third parties.