Contract works insurance

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Contract works cover (CAR) is a coverage which often leaves the most experienced of insurance technicians confused as to who is insuring what and what the cover offers. The aim of this article is simply to touch upon some of the salient features of the coverage, and offer the reader a little more guidance in this specialist field.

The need for contract works (also known as works in progress) insurance arises when a property is being constructed or when it is undergoing refurbishment or renovation. In the case of a new build property then the cover is provided for the works as they are constructed and in the case of building being renovated, for the actual renovation works themselves as distinct to the existing structure, which remains the responsibility of the material damage insurer.

Responsibility for the insurance of the works will be determined by the property owner and the contractor through a form of contract. The most commonly used contract within the UK today is the JCT (Joint Contracts Tribunal), but others exist such as the Institute of Civil Engineers (ICE).

The contract sets out the responsibilities of each party for a whole variety of aspects related to the construction works of which insurance is just one element.

The policy (CAR – Contractors All Risks) provides cover for:

  1.  The contract works – perils as specified by the contract
  2. Materials for incorporation in the contract works
  3. Temporary works.

Where required, the policy can also cover:

  • Construction plant, scaffolding, tools and other equipment for use in connection with the works
  • Site huts and temporary buildings and their contents for use in connection with the contract works
  • Property hired in by the policyholder and for which they are responsible
  • Employees tools and personal effects (for which the policyholder is responsible).

The cover applies whilst the property is on the contract site, in transit (with certain exceptions), or stored away from site (this aspect of cover is very restricted).

The actual insurance requirements vary from contract to contract but the contractors true responsibilities normally far exceed the insurance requirements set out in the contract. Whilst the contract works insurance is usually more than adequate to meet the contractual needs for insurance, there may well be a shortfall in cover which cannot be the subject of contract works, ie damage to existing structures.

The intention of the contract works insurance is to provide protection for the works, materials, constructional plant, etc whilst on the site of the contract. This enables the insured to insure in accordance with the requirement of the contract conditions.

It is not necessary for a formal contract to exist for us to provide insurance cover. Contracts may be covered where the works are not subject to any form of written contract conditions and the scope of the cover provided will be similar to that applying where the works are subject to a standard form of contract. Obviously, this cover cannot exactly match that provided where a contract applies because the written contract will set out the stage at which the contractors responsibilities cease.

This will not be the case with work where no contract exists, where we must rely on common law or ‘understandings’ between the two parties.

A policy may be written in the name(s) of any of the following:

  • The contractor
  • The employer (also referred to as the principal)
  • The contractor and employer jointly
  • A sub-contractor
  • The employer, the contractor and all sub-contractors.

Where contract conditions apply, these will normally determine in whose name(s) the policy should be written. The contractor need not be a builder or a civil engineer, but may be a specialist contractor such as a heating engineer, electrician, plumber, etc.

They may even be an individual, with limited experience, constructing a house for his own occupation, but provided full information is obtained and the wording of the policy is revised accordingly, cover may be provided.

A policy which is to be issued to a main contractor will not normally include the name of any sub-contractor but the sum insured or turnover must include the value of all works carried out by the sub-contractors.

The reason for this is that, at some stage during the contract, a sub-contractor will have completed his portion of the works (the sub-contract works) and handed over the same to the main contractor. Any loss or damage to the sub-contract works after their completion and handover will be the responsibility of the main contractor and will be covered by the policy taken out by the main contractor.

Under many forms of contract the main contractor is made responsible for loss or damage by fire and other specified perils to the sub-contract works during the entire period of the main contract. It is only in special cases that we are prepared to cover all parties involved in a contract. Normally this would be where we are concerned with a major project for which the employer has elected to arrange insurance on behalf of all those involved in the project. Before agreeing to issue a policy on these lines we will require to have full details of all sub-contract work involved and the main and sub-contract conditions.

Types of policy

Annual turnover policy

This is the most common form of contract issued to public sector clients. It would be very costly and impractical to issue a separate specific policy for every contract carried out and it is therefore necessary to provide the insured, where possible, with cover which will provide the necessary insurance on the vast majority of the works carried out by him on an open basis.

There are certain types of civil engineering contracts which are not suitable for open cover insurance. These include tunnels (which exceed 10 metres in length), dams, bridges and work in, on, over or adjacent to water. An annual policy is intended to cover, as far as possible, all the normal contracts undertaken. Leaving the more specialised or large contracts to be dealt with by a specific policy (or by an extension of an annual policy).

The annual policy will exclude all contracts whose estimated original contract price (plus value of free materials) exceeds a certain amount. This amount will be determined by the size of the contractors annual turnover and the value of contracts normally carried out by them. Generally the larger the contract the longer the time taken to complete. Therefore the greater the limit set for any one contract the longer we can expect the works to be at risk and the longer the contract is at risk, the greater the premium required. With this in mind, it is a false economy for the insured to select a limit which will include all his contracts when a considerably reduced limit would be adequate for the vast majority of his contracts. Any exceptional contracts can be dealt with by either a separate specific policy or by endorsing the contract onto the annual policy.

Specific contract policy

This type of policy is designed to apply to one particular contract only and is restricted by description to that contract. The types of contracts covered will vary and will include:

  • Small contracts carried out by contractors who do not consider that the size of their turnover warrants an annual policy
  • Self-build insurance
  • Contracts which are either too large or too hazardous to be included under an annual policy.

When considering the requirements of the authority it is vital that consideration is given to the specific requirements of the authority and that the coverage is regularly reviewed. The insured need to be especially careful to make sure that contracts which could fall outside of the annual cover, such as a contract which exceeds the policy limit or is on special works such as tunnels and the like, are brought to the attention of insurers so that contract specific cover can be arranged.

Philip Farrar
December 2007 
Republished October 2014

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