Contractor All Risk (CAR) Insurance

Contractor All Risk insurance is a specialist construction insurance policy that provides comprehensive cover against physical loss or damage to the works being constructed, plant and equipment on site, and third-party bodily injury or property damage claims arising from the construction activities. In Indian government procurement, CAR insurance is a mandatory contract condition in most works contracts above a specified value, CPWD contracts, state PWD contracts, NHAI EPC contracts, and PSU works contracts routinely require the contractor to take out and maintain a CAR policy for the full duration of the contract, starting before work commences.

What is CAR insurance in government procurement?

CAR insurance combines two broad covers in a single policy. Section 1 covers material damage, accidental loss or destruction of the contract works, temporary works, and contractor's plant and equipment on or adjacent to the site. Covered perils include fire, flood, earthquake, storm, theft, and accidental damage during construction. Section 2 covers third-party liability, legal liability for bodily injury or property damage caused to third parties (neighbours, passers-by, subcontractors' employees not covered separately) as a result of the construction activity.

The policy sum insured for Section 1 is typically the full contract value (since the maximum loss is the destruction of the entire work being done). For Section 2, the limit per occurrence and per policy period is specified in the contract or the NIT, a minimum of Rs 1 crore per event and Rs 5 crore per policy period is common for large projects, though limits are negotiated between the insurer and the buyer based on project risk.

Government contracts require the contractor to submit the CAR policy document (or certificate of insurance) as a condition precedent to receiving the Work Order or Notice to Proceed. Some contracts require the procuring entity to be named as a co-insured or loss-payee on the policy, so that in the event of a major loss, the insurance proceeds are not misappropriated by the contractor but are directed towards rebuilding the works.

The cost of CAR insurance, typically 0.3% to 0.8% of contract value per year depending on the risk profile (type of construction, location, duration), must be included in the contractor's overhead pricing in the BOQ or in the lump-sum price for EPC contracts. Treating CAR insurance as an afterthought leads to cost-plan shortfalls.

Why it matters for bidders

CAR insurance is commercially significant for two reasons. First, it is a mandatory contract condition, failure to maintain a valid CAR policy throughout the contract period is a breach that can result in suspension of RA bill payments and, in extreme cases, termination. Second, an uninsured major loss on a construction project, fire destroying half-completed work, flood damaging embedded structures, can be financially catastrophic for the contractor and may trigger insolvency.

Procurement of CAR insurance should be done with a broker experienced in construction risk, because the standard exclusions, wear and tear, faulty design, consequential loss, can leave significant gaps in cover if not carefully managed. Some government contracts specify additional covers such as Advance Loss of Profits (ALOP) insurance (which compensates for delayed start-up revenue), Marine Transit cover for imported equipment, and Workmen's Compensation (which is often a separate policy).

For JV contracts, the JV itself should hold the CAR policy, not any individual JV partner, a single integrated policy avoids co-insurance disputes in the event of a claim.

Example

A contractor wins an NHAI EPC contract for four-laning of a 50 km highway, estimated at Rs 1,400 crore, over a 36-month construction period. The contract conditions require CAR insurance with Section 1 sum insured of Rs 1,400 crore (full contract value) and Section 2 limit of Rs 5 crore per occurrence. The contractor obtains a CAR policy from a General Insurance Company (New India Assurance Co.) at a premium of approximately Rs 3.5 crore (0.25% of contract value per year, for 3 years). The policy is submitted to NHAI before the Notice to Proceed is issued. In the second year, a flash flood damages an incomplete bridge deck estimated at Rs 12 crore. The contractor files a claim; the insurer surveys the damage, accepts the claim at Rs 10 crore (applying the policy deductible), and the contractor uses the insurance proceeds to rebuild the structure.

Key rules / thresholds

• CAR policy must be in force from the start of works until the issue of the Completion Certificate (or Defect Liability Certificate if the contract so specifies).
• Standard exclusions in CAR policies include: pre-existing damage, wear and tear, defective design (but damage caused by defective design is covered), consequential loss, and war risk.
• Some CPWD and NHAI contracts require the policy to cover the Defect Liability Period as well, verify this from the contract conditions.
• The policy must be placed with an IRDAI-registered Indian general insurer or a Lloyd's of London market insurer with an Indian licensed subsidiary, foreign insurers without India registration cannot issue policies for India-based projects.