Unpacking Contractors’ All Risk Insurance

What is Contractors’ All Risk (“CAR”) insurance?

When undertaking works in relation to a construction project, whether as a main contractor or sub-contractor, it is essential to take out insurance policies for potential risks, such as employee injuries, damage to third party property, injury to third parties, negligent design (if undertaking design), destruction of the works whilst being constructed and, particularly for large projects, terrorism risk.

Contractors’ All Risk Insurance is a type of insurance policy for construction projects that, as the name suggests, covers a broad range of risks. It is mainly focused on protecting the works, and related plant and machinery that will be incorporated into the works, during construction. Contractors’ All Risk insurance does not describe the specific types of incidents, such as fire or ground movement, that it covers. Instead, the default position is that it covers “all risks” to the works, plant and machinery, subject to a list of exclusions.

Understanding Contractors’ All Risk insurance coverage: what do CAR policies look like?

Although most industry-standard construction contracts, such as JCT and NEC contracts, require some form of “Contractors’ All Risk Insurance” to be taken out, there is no standard example of a Contractors’ All Risk policy. Different insurers offer varying features and coverage for their CAR policies, making it essential to seek professional advice on a particular policy’s scope of coverage.

Contractors’ All Risk policies, notwithstanding their variety, can be readily identified by some common features. The main ones are:

1.  Covering at least both (i) the works under construction or refurbishment and (ii) site materials.
2.  Covering liability to third parties for property damage and personal injury (when provided on its own, this is known as public liability insurance).
3.  Usually covering the contractor’s plant and equipment (whether owned or hired) used during the construction of the Project.
4.  Defining the scope of cover through a list of exclusions, rather than a list of inclusions as with ’named perils’ or ‘specified perils’ cover.
5.  Covering, as an optional add-on, consequential losses flowing from damage to the works.
6.  Covering, as an optional add-on, ’no-fault’ or ‘“non-negligent’ liability, such as for damage to a neighbouring property caused by subsidence which cannot be attributed to any specific act of negligence (when provided on its own, this insurance is often known as a JCT 6.5.1 policy).

Significantly, Contractors’ All Risk policies do not cover mistakes and/or negligence in advice or design. Design defects and professional negligence is covered by a separate professional indemnity insurance policy.

Other common exclusions from Contractors’ All Risk policies often consist of:

•    Directors’ and officers’ liability
•    Defective workmanship
•    Wear and tear
•    Avoidable damage
•    Loss of profit
•    International work
•    Employers’ liability for personal injuries.

Who takes out the Contractors’ All Risk policy under JCT contracts?

Generally, standard JCT construction contracts require a Contractors’ All Risk policy to be taken out by one of the parties (as specified in the contract) in the “joint names” of the contractor and the employer which, unless the JCT contract is amended, must cover the replacement value of the works plus an additional15% to cover professional fees associated with the replacement.

For new-build projects, the parties must decide between themselves whether the contractor or the employer takes out the policy. Generally, a contractor will be prepared to cover this obligation where it has an annual policy covering all projects it is working on up to a certain size. For more complex and high-value projects, the employer might prefer to cover this obligation by arranging a one-off, project-specific policy.

For refurbishment projects and other works to existing buildings, the default position is for the employer to take out insurance policy (or policies) to cover both the existing buildings as well as the contractor’s works, plant and machinery . This can cause complexities for projects where the employer does not own the entire existing building, such as where the employer is a tenant and undertaking a fit-out. A custom approach involving negotiation with the employer’s landlord, in addition to the employer and contractor, might be needed here. Notably, the JCT contracts do not include standard insurance provisions for tenant-employers undertaking fit-out projects and bespoke insurance arrangements will need to be negotiated and drafted with input from both lawyers and insurance brokers/providers.

The JCT-required Contractors’ All Risk policy covers subcontractors, but only in respect of a more limited set of risks. If you are a subcontractor for a project and need to understand your insurance position, you should take specialist advice.

Who takes out the Contractor All Risk policy under NEC4 contracts?

NEC4 construction contracts, like JCT, require a Contractors’ All Risk policy to be taken out in the “joint names” of the contractor and the employer. Unless an NEC4 contract is amended, it is the contractor’s responsibility to take out a CAR policy, and the contractor is only required to ensure that the CAR policy covers the contractor's risks in the works, materials and plant. This means that, for any risks allocated under the contract to the employer, the employer will not be protected despite being a party to the Contractors’ All Risk policy.

Who takes out the Contractors’ All Risk policy under FIDIC 2017 contracts?

FIDIC 2017 construction contracts require the contractor to take out a Contractors’ All Risk policy. Unless amended, this must cover the replacement value of the works plus an additional 15% to cover additional costs such as demolition and professional fees. As with JCT and NEC contracts, the policy must be in the “joint names” of the contractor and the employer.

How is a Contractors’ All Risk policy taken out and who is named under it?

Most main contractors take out an annual CAR policy. This gives a financial saving compared to a series of project-specific policies. Where the employer is responsible for taking out a Contractors’ All Risk policy — particularly for large and complex projects — it will purchase a policy on a project-specific basis.

The cost of a CAR policy will depend on a combination of factors, usually including:

•    The value of the construction works
•    The project’s location
•    Whether the works present a higher risk by being located at height or below ground
•    The extent of site security
•    The duration of the construction works
•    Whether the policy is annual or project-specific
•    The contractor’s claims history.

Regardless of whether the contractor or the employer takes out the policy, both the contractor and the employer will usually be named on the policy as insured parties in joint names. 

Where a funder provides financing for a project, it will usually expect its interest to be protected by a Contractors’ All Risk policy by being an additional “joint name” on the policy. Sometimes, insurers will offer to merely have a funder’s (or other third party’s) interest “noted” on the policy. Noting a third-party’s interest under an insurance policy offers far less protection because whilst the nature of the funder’s (or third party’s) loss would be covered by the policy, the will not be party to the policy and any pay-out for such losses will be made to the policyholder, i.e. the contractor and/or any other joint named party.

It is also possible for CAR policies to cover sub-contractors even when they are not specifically named on the policy, but this is a complex area of law which cannot be adequately addressed within the space of this article.

What does it mean for a Contractor All Risk policy to be in “joint names”?

Where, as is usually the case, a CAR policy is in “joint names” of multiple parties, this does not mean that the CAR policy is a “joint insurance” policy. Joint insurance covers the identical interests of multiple parties, such as the interests of a married couple in a house they jointly own. Joint interests are rarely, if ever, the case with a construction project. The contractor and the employer have different interests in the project.

Where a Contractors’ All Risk policy is in joint names, it will be a “composite insurance” policy (also known as “co-insurance”). Where a policy is “composite” it is a single policy that covers the differing interests of several parties. 

Essentially, it is a collection of insurance policies which, for administrative ease and to lower costs, have been brought together in a single policy. Because the contractor and the employer have differing interests in the construction project, they derive different protections from a joint names Contractors’ All Risk policy, in contrast to having joint identical interest as with a joint insurance policy. This is an important fact to be aware of, on which both parties need specialist legal advice.

Additionally, under a “joint names” policy, the insurer has no right of subrogation. This benefits all parties that are jointly named under the policy .

Subrogation is a technical concept in insurance law which allows insurers to bring claims in respect of an insured loss in the name of an insured party. For example, if a home insurance policy responds and pays out the costs to rebuild a house destroyed in a fire caused by a negligently designed electrical appliance, the insurer can subrogate the claim that the insured homeowner would have against the manufacturer, essentially stepping into the homeowner’s shoes and pursuing the manufacturer of the appliance as if it was the homeowner.

With a joint names Contractors’ All Risk policy, the insurer generally does not have the right to subrogate claims against the insured parties. This means that if, for example, the insurer pays out for a loss that was the contractor’s fault, the insurer cannot then pursue the contractor as if it was the employer (in legal language, the insurer cannot subrogate itself to the employer’s legal rights against the contractor). It would not make commercial sense for the insurer, having paid out under the policy, to be able to sue a party also insured by the policy.

Conclusion

In summary, although Contractors’ All Risk insurance is simple and reassuring at first glance by covering “all risks”, it is a complex — but also essential — type of insurance policy for construction projects.

By often covering multiple parties, as joint-named insureds, and covering multiple types of risk within a single policy, these policies can be more cost effective, easier to administer and quicker to procure than other types of policies. 

However, this type of consolidated policy can introduce various complexities, such as differences in the level of protection offered to a main contractor and an employer, subrogation, variable protection offered to subcontractors and different ways of protecting the interests of a funder. It is therefore essential for any party to a construction project that wishes to be protected by a Contractors’ All Risk policy to seek specialist advice on the terms of the relevant policy.

Whilst we are not insurance advisers, we are regularly involved in drafting the insurance provisions of construction contracts. We also regularly liaise with insurance brokers and other technical advisers to assist clients with their insurance requirements and legislating for these in their construction contracts.