What Are Some of The Conditions Applicable To The Construction All-Risk Policy Claims?

There are two types of losses payable by a construction all-risk (CAR) policy:

1. Material Damage
2. Third-Party Liability

These conditions are derived from the principle of indemnity and ensure that the insured does not profit from the insurance claims.

Key Takeaways

• The Anti Modification Barrier: A construction all-risk contract functions strictly as a safety net for accidental loss; it will refuse to cover expenses incurred on alterations and improvements or any system upgrades.

• The Employee Exclusion Guardrail: Section 2 liability coverage enforces a strict boundary; the project employer or employee cannot be a party to the damages claim, as their injuries fall under separate workers’ compensation lines.

• Dual Section Claims Isolation: During a regional catastrophe like an earthquake, an insurer can independently approve a third-party liability claim under Section 2 even while the physical property claims are still being processed.

• Indemnity and Salvage Payout Deductions: Payout calculations are tightly regulated to ensure the insured does not profit; final material settlements subtract the value of recovered parts (salvage) from the pre-loss asset value.

• Litigation & Defense Funding: When a third-party property damage claim goes to court, the insurer covers both the cost of litigation recovered by the claimant and the builder’s defense fees, provided they consented to the strategy.

• The Absolute Sum Insured Ceiling: No matter how severe a site disaster becomes, the combined payouts for both material damage and third-party liabilities are limited to the master sum insured written in the policy document.

Conditions Applicable to Material Damage Claims

• Repairable damages should be repaired unless the cost of repair exceeds the cost of replacement
• The loss payable will be proportioned based on:
  • The actual value of the property immediately before the loss less salvage (cost of recovered parts)
  • The part of loss payable by the insured
• The cost of alterations and improvements is not paid by the insurer
• The insurer may bear the cost of provisional repairs if:
  • These repairs are part of the final repairs &
  • Do not increase the total repair cost

Conditions Applicable to Third-Party Liability Claims

• Employer or employee cannot be a party to the damages claim
• Legal liability for the damage to property belonging to a third party:
  • Held in trust, or
  • Adjacent to the own premise
• Legal liability for fatal or non-fatal injury to a third party (customer/vendor/visitor/general public)
• Cost of litigation recovered by the claimant
• Cost of defense in the court of law as consented by the insurer

All the claims are limited to the sum insured under the policy. Also, it covers a fire insurance policy that offers coverage against loss or damage that happens due to fire.

Case: 1

Founded in 2009, L.S Engineering has become a global name in a short span of time. A few months back, the company bought a milling machine. As the company had a construction all-risk insurance policy, Mr. Rahul Saran decided to alter and improve the machine with new technology and ask the insurance company to settle the claim.

Rahul asked his team to go ahead with the altercation with the milling machine. The total cost came to be Rs 1 lakh. When Rahul approached the construction all-risk insurance company,

the insurer refused to, settle the claim. So, as the expenses were incurred on the alterations and improvements of the machine, these were not covered by the insurer. There was an important clause in the construction all-risk insurance policy which clearly states that the cost incurred on the alteration and modification of the vehicle will not be covered.

In this case, L.S Engineering incurred expenses on the modification of the machine, and therefore, they were not covered by the insurer.

See: What does the 72-hour clause signify in the construction all-risk policy?

Case: 2

Over the last few years, R.J Engineering has successfully established itself in the engineering sector. So far, the company has completed various construction. Last year, the company bought a construction all-risk insurance policy to get coverage against loss or damage that may arise from theft, damage, pilferage, and more.

Last month when the company was constructing a four-story building in Pune, an earthquake happened, and the under-construction building fell on the vehicles standing by. It caused severe damage to vehicles, who later approached R.J Engineering for compensation.

Read More: What is Construction All Risk Insurance?

Summary Table: Underwriting Framework and Dual Sections of CAR Insurance

As L.J Engineering had a construction all-risk insurance policy, the company approached the insurer for settling the third-party claim. As per Section 2 of the policy, the insurance policy is liable to settle the third-party liability claim falling on the insured contractor due to bodily injury or property damage caused to a third party.

In this case, the insurer scrutinized the situation and agreed to settle the claim. Though, during an earthquake, loss or damage happened to the building of L.J Engineering as well, however, the insurer settled the third-party claim only under Section 2 of the policy.

Frequently Asked Questions (FAQs)

1. What are the two primary sections covered under a construction all-risk insurance policy?

A) A construction all-risk (CAR) insurance policy is structurally divided into two primary parts: Section 1: Material Damage (which covers physical loss, destruction, or damage to contract works, project machinery, and on-site equipment) and Section 2: Third-Party Liability (which underwrites legal liabilities for bodily injury, death, or property damage caused to external third parties).

2. Does a construction all-risk policy cover the cost of upgrading machinery on-site?

A) No, a construction all-risk policy explicitly excludes the cost of alterations and improvements or any technological modifications. The policy is governed by the principle of indemnity and is designed solely to repair or replace an asset to bring it back to its original condition before an accidental loss occurred.

3. Are project employees covered under the third-party liability section of a CAR policy?

A) No, an employer or employee cannot be a party to the damages claim under the third-party liability section of a CAR policy. This section is strictly reserved for the general public, including customers, vendors, and visitors. On-site worker injuries must be underwritten separately using a Workmen’s Compensation Insurance Policy.

4. How does an insurer calculate the payout for a total loss material damage claim under a CAR policy?

A) For a total loss scenario, the insurer calculates the final settlement based on the actual value of the property immediately before the loss occurred, rather than its brand-new replacement cost. The adjuster determines this figure by reviewing original equipment invoices and deducting both realistic depreciation and the value of any recovered parts (salvage).

5. What is the underwriting rule for provisional or temporary field repairs on a construction site?

A) The general insurance company will agree to bear the financial costs of provisional or temporary repairs under two strict conditions: these temporary fixes must form an integral part of the final permanent repairs, and they must not increase the overall estimated repair cost of the damaged asset.

6. Does a builder’s third-party liability cover include damage to adjacent properties?

A) Yes, Section 2 of a construction all-risk policy explicitly underwrites legal liabilities arising from physical damage to property belonging to a third party that is located adjacent to the construction premises or held in legal trust by the contractor, protecting the building firm from costly civil litigation and court costs.

About The Author

Shivani

MBA Insurance and Risk

She has a passion for property insurance and a wealth of experience in the field, Shivani has been a valuable contributor to SecureNow for the past six years. As a seasoned writer, they specialize in crafting insightful articles and engaging blogs that educate and inform readers about the intricacies of property insurance. She brings a unique blend of expertise and practical knowledge to their writing, drawing from her extensive background in the insurance industry. Having worked in various capacities within the sector, she deeply understands the challenges and opportunities facing property owners and insurers alike.