Construction Risk has a blueprint

Contractors All Risks, usually shortened to CAR and also called Contract Works insurance, is built to protect the physical works while they are being built, altered, repaired, renovated or installed. Despite the name, “All Risks” does not mean every possible loss is insured. What is actually covered depends on the construction contract, the project value, the type of work, site conditions, existing buildings on the property, materials, subcontractors, testing, the programme and the exact policy wording.

The sum insured is where most of the risk hides. For a R20 million project, cover should not simply track the amount currently owed to the contractor or the value of work completed so far. A R20 million build might only be R8 million complete when a major fire hits, and the policy still needs to be enough to reinstate the full project as it grows toward completion.

That figure needs to account for the full contract value, including labour, materials, any materials the employer supplies directly, VAT where it applies, escalation and any other cost the contract or policy requires to be insured. Professional fees and debris removal after a loss may sit inside the sum insured or as separate extensions, and both are worth checking.

The original tender price ages fast. Variation orders, extra work, imported equipment and material inflation can push the real project value well past what was insured at the start, so the sum insured should be reviewed as the project changes, not just set once at signing.

Do not assume the contractor automatically has to arrange the CAR policy. The building contract itself should say who is responsible for arranging cover and which parties need to be insured. This can include the employer, principal contractor, subcontractors and anyone else with an insurable interest in the works.

A certificate showing a contractor has CAR insurance is not proof of much on its own. The real questions are whether this specific project is insured, whether the sums insured are adequate, whether the right parties are named, whether the actual work being done falls within the policy and whether the cover matches what the building contract requires. This matters most where an employer appoints several contractors directly. Split insurance responsibilities can leave gaps where one contractor damages another’s work, or no one is clearly on the hook for part of the project. The signed contract and the policy schedule should be read together, not separately.

Where a policy covers multiple contracts over a year, known as an annual or open CAR policy, it will state a Maximum Contract Value the insurer has agreed to cover. This is not ordinary underinsurance where a claim gets reduced proportionately. If the policy covers contracts up to R20 million and a R30 million project is taken on without first declaring it, that project can fall outside the cover entirely, and a serious claim can be rejected rather than merely reduced.

That limit should include everything the policy counts toward contract value, including free issue materials and VAT where relevant. The value of every new contract should be checked against it before work starts, and watched during the build, since a R19 million contract can quietly become a R23 million contract through variation orders alone.

Materials meant to become part of the finished project, such as bricks, steel, timber, cable, switchgear, plumbing equipment, glazing, air conditioning gear and imported fittings, normally form part of the contract works. Free issue materials deserve particular attention. These are items the employer buys directly and hands to the contractor to install, like a R2 million generator. If the contractor becomes responsible for that item, its value needs to be properly built into the insurance. Simply using the contractor’s tender price can leave employer-supplied materials outside the insured value altogether.

Not every material travels straight from supplier to site. Equipment can sit in a warehouse, contractor’s yard, storage facility or port for weeks, and imported equipment may pass through several locations before it arrives. CAR does not automatically follow materials wherever they happen to be. Off-site storage and transit cover should be specifically checked wherever significant value is held away from site or in transit.

These policies often carry their own limits per location and their own conditions around security, theft, unattended vehicles and storage construction. Copper, cabling, electrical equipment, sanitaryware and high-value imported fittings are the usual theft targets, so security conditions are worth reading before they are tested by a loss, not after.

Temporary works are structures needed to build the project but which never form part of the finished building. Examples include scaffolding, formwork, falsework, shoring, temporary supports, hoardings, temporary access roads, drainage, site services and temporary electrics.

The risk is often bigger than the temporary works themselves. A failure of temporary support can damage the new works, an existing building next door and neighbouring property, causing losses far beyond what the scaffolding or shoring was ever worth. That is why temporary works belong in the engineering assessment as much as the insurance one, not as an incidental line item.

This is one of the most important issues on any alteration, renovation or refurbishment project. CAR insures the work being carried out. It does not automatically mean the building that existed before the contractor arrived is insured too. Picture a R3 million refurbishment happening inside a R160 million commercial building. The construction contract is worth R3 million, but a fire during the work could damage a substantial portion of the R40 million existing building. That is two very different risk questions, not one.

The employer’s existing property policy should be checked before construction starts, and the insurer must be told in full about the renovation, structural alterations, roofing work, hot works or excavation taking place. The CAR policy may also need an existing property or surrounding property extension, ideally to the full value of the existing building.

Surrounding property cover deals with existing property that could be damaged as a result of the project without forming part of the new contract works. This can include retained sections of a building, roads, paving, boundary walls, services and fixtures around the site. This definition varies by policy, so it should not be assumed or guessed at. If R20 million of existing property is genuinely exposed, a R500,000 surrounding property limit solves very little. Where an unrelated third party’s property, such as a neighbour’s building, is damaged, that claim sits under the liability section instead. First-party property cover and third-party legal liability are different exposures and should not be confused.

Care, custody or control, usually shortened to CCC, is a common construction liability gap. Ordinary public liability cover often excludes damage to property that has been handed to the contractor, is being actively worked on or is otherwise under the contractor’s control.

Think of an electrician upgrading an existing switchboard, a plumber working on an existing water system, a contractor removing and reinstalling machinery or a restoration contractor working on valuable finishes. The property may belong to someone else, but that does not automatically mean ordinary public liability responds. The contractor may have taken that property into its care, or may literally be working on the item that gets damaged.

A proper review should establish exactly how the policy treats existing property, property being worked on, employer-owned property, property handed to the contractor and anything else in the contractor’s care, custody or control. This is an area where small wording differences create very large differences in what actually gets paid.

Excavation can change the risk profile of an entire project. Removing soil, demolishing structures, dewatering, underpinning foundations or piling can affect the physical support of the site and neighbouring properties, leading to cracking, settlement, collapse, subsidence or damage to retaining walls, underground services, roads and adjoining buildings. Ordinary public liability cover will usually restrict claims involving vibration, removal or weakening of support, subsidence, heave, landslip or similar ground movement.

In South African law, lateral support matters a great deal. A landowner owes neighbouring property a duty of lateral support, and if excavation removes that support and causes damage next door, the landowner can be held strictly liable. The neighbour does not necessarily have to prove negligence. That means an employer or principal who owns the site can face liability even where a contractor physically carried out the digging. Appointing a competent contractor does not remove the landowner’s own exposure.

Specific lateral support liability cover should be considered before excavation starts, with attention to both the landowner and the contractor and exactly who is insured under the policy. For higher-risk work, insurers may want geotechnical reports, structural engineering information, shoring designs, method statements, adjacent-building details and pre-construction condition surveys. Photographs and crack surveys taken before excavation begins can matter enormously if a neighbour later alleges the works caused existing damage. Insurance cannot repair poor engineering after the event. Temporary support, excavation design and site monitoring remain the real risk controls.

The liability section of a CAR policy can protect the insured against legal liability for accidental injury to third parties, or accidental damage to third-party property, arising from construction activities. Examples include falling material injuring a member of the public, water damage to an adjoining shop, a damaged underground service or a crane operation damaging neighbouring property. Cover does not pay every loss that happens near a site. There has to be a legal liability on the insured, and the claim stays subject to the wording, exclusions and limit of indemnity. The limit should reflect the worst credible third-party loss, not the cheapest available option, and defence costs matter too, since a major liability claim can run for years before responsibility is finally settled.

Construction projects involve many parties, and one insured party can easily cause loss to another. Examples include a subcontractor damaging the principal contractor’s work, one subcontractor damaging another’s installation or a direct contractor damaging completed works. Cross liability provisions matter wherever several parties sit under the same liability policy, and it is worth understanding whether liability from subcontractors is covered and what insurance those subcontractors are required to carry themselves. Using a subcontractor transfers the work. It does not automatically transfer all the financial consequence of that work.

Excesses can differ by event type. Water damage, theft, excavation and subsidence often carry higher excesses than ordinary accidental damage, and the building contract should say which party ultimately pays them. The better question is not “what is our excess?” It is what excess applies to this type of loss, who has agreed to pay it and whether that amount could genuinely hurt either party financially.

Installing equipment and switching it on for the first time are not the same risk. Testing and commissioning matters most on mechanical, electrical, HVAC, lift, generator, solar and manufacturing projects, where equipment is energised, heated, pressurised, loaded or run for the first time. An electrical fault during commissioning, or a mechanical failure during testing, can damage equipment worth millions. The policy should be checked for the permitted testing and commissioning period, and whether the specific type of testing is covered. The project programme should allow for it too, so cover does not lapse just as the most expensive equipment is switched on.

CAR is not a workmanship guarantee. If work has been done badly, the policy is not designed to pay for doing that same work properly a second time. Rectification of the defective work itself is generally excluded. The harder question is what happens when defective work damages other, otherwise sound parts of the project. Defective waterproofing lets rain in and damages ceilings, flooring, electrical fittings and finishes. The cost of replacing the waterproofing itself may be excluded, while some of the resulting damage to other insured property may still be covered. It depends entirely on the defects wording, and different policies treat this differently. The useful question is not whether CAR “covers defective workmanship”. It is which part of a loss caused by defective work the policy will actually pay.

CAR and Professional Indemnity solve different problems. CAR responds to insured physical loss or damage. Professional Indemnity deals with legal liability arising from negligent professional services such as design, specification, engineering advice or supervision. This distinction matters most on design-and-build contracts, where a contractor accepting design responsibility, or departing from the professional plans, needs its own standalone PI cover.

A construction loss can create a second financial loss bigger than the physical damage. If a hotel due to open on 1 December suffers a major insured fire in October that delays opening by six months, CAR pays to repair the insured physical damage. It does not replace the six months of lost hotel revenue. The same applies to factories, warehouses, shopping centres and any project expected to generate income after completion. Specialist Delay in Start Up or Advanced Loss of Profits cover can address that gap. CAR rebuilds the works, and this kind of cover protects the financial result that depended on opening on time.

A major fire or collapse does not leave a clean site ready for reconstruction. Damaged structures may need demolishing, and burnt material, concrete and contaminated rubble need to be removed and legally disposed of before rebuilding starts. Removal of debris cover addresses these additional costs, and the limit should reflect the scale of the project.

A major loss may also require architects, structural engineers and quantity surveyors to design and supervise the reinstatement. Professional fees cover can protect those reasonable fees, distinct from Professional Indemnity, which deals with a claim that a professional made a negligent error in the first place, not the cost of rebuilding after an insured event.

Practical completion is one of the most important risk-transfer points on a project. Under commonly used JBCC arrangements, responsibility for the works generally moves to the employer at practical completion, subject to the contract and any amendments, and the insurance needs to move with it. Before handover, the works sit primarily under CAR. After handover, the completed building needs to be fully picked up by the employer’s ordinary property insurance. This gets more complicated on projects completed in sections, such as one floor complete and occupied while construction continues on another, or a shopping centre trading while contractors still work elsewhere. The insurance programme has to follow those changes, with the contract as the starting point for who insures what.

Early occupation deserves particular attention. An employer or tenant moving in before formal completion changes the exposure entirely, potentially putting occupants, furniture, stock, equipment and members of the public inside a building where construction is still under way. Both the CAR insurer and the employer’s property insurer should be told before early occupation happens, and the insurance arrangement agreed in advance rather than after the fact.

CAR can extend into the contractual maintenance or defects period, but that is not a blanket promise to fix everything that goes wrong after handover. It typically covers damage caused while the contractor returns to perform maintenance, or certain damage connected to events that originated during construction. It does not turn poor workmanship into insured workmanship. A twelve month maintenance period noted on a schedule does not tell the whole story. What remains insured, and for how long, needs to be checked and matched against the construction contract.

Latent defects are hidden problems, like concealed waterproofing faults, foundation issues or incorrect reinforcement, that only surface after completion. These should not be assumed to be covered by ordinary CAR once the construction and maintenance periods have ended. They may need contractual liability cover, Professional Indemnity, products liability or specialist latent defects insurance. Residential projects also carry separate NHBRC requirements, with warranty periods including defects notified within three months of occupation, roof leaks within one year and major structural defects within five years. These are worth checking against current legislation for the project at hand.

A half-completed building does not stop being exposed just because construction has stopped. A project can be suspended over a dispute, a funding problem, a planning issue, contractor insolvency, termination or a serious loss, and an unfinished building can be left with an incomplete roof, temporary waterproofing, open services, incomplete drainage, temporary electrics and reduced site security. The risk usually goes up while no one is working, not down. Any material suspension or delay should be reported to the broker and insurer, who may need details on site security, weather protection, temporary works and the expected recommencement date. Do not assume an original twelve-month construction policy still fits once the project quietly becomes an eighteen-month one.

Termination creates another important handover. If the original contractor leaves halfway through, someone needs to work out immediately who controls the site, who carries the risk in the unfinished works, who is responsible for materials already delivered, whether the original policy stays operative, when the replacement contractor’s responsibility begins and whether the insurer has agreed to the change. A project is often at its most physically vulnerable in the gap between contractors. Full disclosure to insurers should be part of the termination and replacement process itself, not something sorted out weeks later.

Some of the largest construction losses start with the most ordinary activities. Welding and grinding can start major fires. Roof replacement can expose an existing building to sudden rainfall. An incomplete plumbing system can release large volumes of water, and temporary drainage can fail during a storm. Policies may carry warranties or conditions around these activities. CAR should sit behind good site controls, not replace them. Opening a large section of roof right before heavy rain creates a problem no policy is designed to fix after the fact.

Construction sites are also attractive theft targets. Copper, cabling, tools, equipment, sanitaryware, appliances and specialist materials can disappear quickly. Theft cover is often subject to security conditions, such as guards, fencing, alarms, forcible-entry requirements and its own excess separate from the standard one. Those requirements are worth understanding before a theft happens, not after.

CAR does not automatically mean everything physically present on site is insured. Excavators, TLBs, loaders, cranes, compressors, generators, welding equipment, portable tools and hired-in equipment need their own cover, and hire agreements deserve particular attention. A contractor hiring a R3 million excavator can become responsible not only for physical damage or theft, but also recovery costs and continuing hire charges while it is out of action. Road-licensed vehicles will normally need their own motor insurance.

None of this replaces good practice off the insurance side. A performance guarantee is a financial-security tool, not insurance. CAR being in place does not protect a contractor from a valid call under a guarantee. Health and safety planning, risk assessments, competent appointments and site controls remain the contractor’s responsibility regardless of what the liability policy says, and the principal contractor should confirm that subcontractors carry the appropriate Compensation Fund or authorised compensation arrangements. Calling someone an “independent contractor” does not, on its own, remove that exposure.