A construction project involves concentrations of capital, coordinated risk across multiple parties, and a sustained exposure period that can run from months to several years. Whether you are a developer financing a residential complex in Istanbul, an EPC contractor executing a renewable energy plant in the Aegean, or an investor overseeing the erection of industrial machinery in an organised industrial zone, the insurance programme protecting that project requires careful thought. Two products sit at the centre of almost every construction insurance arrangement: Contractors' All Risks (CAR) and Erection All Risks (EAR). But understanding the scope of these policies — and identifying the significant gaps that standard forms leave — is where most developers fall short.

CAR vs EAR: Two Policies, Different Projects

Although they share a common architecture and are often discussed together, CAR and EAR policies respond to distinct project types and the distinction matters for both underwriting and coverage purposes.

Contractors' All Risks (CAR) is designed for civil engineering and building projects. The prototype CAR risk is a building under construction — a reinforced concrete structure, a road, a dam, a bridge, or a mixed-use development. The insured works are primarily composed of materials in their final or near-final state: concrete, steel reinforcement, masonry, roofing, and fit-out. The physical risks are dominated by fire, storm, flood, collapse, theft, and accidental damage during construction.

Erection All Risks (EAR) is designed for the installation and testing of plant, machinery, and equipment. The prototype EAR risk involves prefabricated or manufactured components being transported to site, erected, connected, and tested. The insured works might include a gas turbine, an industrial press, a solar inverter array, or a wind turbine drivetrain. EAR policies typically extend to cover the testing and commissioning phase, which CAR policies do not routinely include, because the risks associated with bringing machinery under load for the first time are distinct from civil construction risks.

Many large projects — an energy-from-waste facility, a data centre, a combined-cycle power plant — involve both civil works and equipment erection. These projects generally require a combined CAR/EAR programme structured to avoid gaps and overlaps between the two sections.

Section 1 — Material Damage

The material damage section of both CAR and EAR policies provides all-risks cover for physical loss or damage to the insured works during the construction or erection period. "All risks" means that the policy covers any fortuitous loss unless specifically excluded — the burden is on the insurer to demonstrate that an exclusion applies, rather than on the insured to demonstrate that the cause of loss falls within a named peril.

The sum insured for the material damage section should represent the full replacement value of the completed project — not the contract value, which may exclude owner-supplied materials, escalation provisions, or the value of items brought to site by specialists working outside the main contract. Under-insurance at this stage can result in proportional claim settlements that leave the principal substantially out of pocket.

Key material damage provisions to review in any construction policy include:

Section 2 — Third-Party Liability

The third-party liability (TPL) section of a CAR or EAR policy covers the insured's legal liability for bodily injury and property damage caused to third parties in connection with the construction activities. This is not employers' liability (which covers workers) but rather the liability exposure to members of the public, neighbours, visitors, and any other party who is not part of the insured contract.

Construction projects create significant third-party liability exposures. Falling debris, vibration damage to adjacent properties, flooding caused by disturbed drainage, road traffic incidents involving project vehicles on public roads — all of these can give rise to claims from parties entirely outside the contract. In a dense urban environment, the exposure can be substantial.

The TPL limit should be selected with reference to the project's location and the realistic worst-case scenario. A TRY 10 million limit that seemed adequate three years ago may be insufficient for a major infrastructure project adjacent to a hospital or a high-footfall shopping centre today. Underinsured TPL limits are a pervasive problem in the Turkish construction market.

DSU and ALOP: The Cover Developers Forget

Delay in Start-Up (DSU) insurance — also known as Advance Loss of Profit (ALOP) — is the cover that developers and project finance lenders most frequently overlook, and the one whose absence can be most financially devastating.

Consider the commercial logic: a developer finances a shopping centre with a bank loan. The debt service begins at practical completion. The retail tenants pay rent from the date of handover. If a covered peril — a fire, a structural collapse, a major storm — destroys completed works and delays handover by eight months, the physical loss is covered by the CAR policy. But the eight months of lost rental income, and the debt-service payments that must still be made during the delay, are not covered by material damage insurance. DSU/ALOP covers exactly these consequential financial losses.

Material damage insurance replaces the bricks and mortar. DSU/ALOP replaces the revenue stream that those bricks and mortar were supposed to generate. A developer without DSU cover is fully exposed to the financial consequences of a delay that may not be their fault at all.

DSU/ALOP is available as an extension to the CAR or EAR material damage section and is triggered only when a material damage loss under the same policy causes a delay to the project's commercial start date. The cover period is defined as the indemnity period — typically six to twenty-four months — and the sum insured should represent the anticipated revenue or profit stream that would have been generated during that period.

For project finance transactions, lenders increasingly require DSU/ALOP as a condition of facility drawdown. Even where lenders do not explicitly require it, a developer who has taken on personal guarantees or significant equity should regard it as essential self-protection.

LEG Defective Design Clauses: LEG 1, LEG 2 and LEG 3

One of the most technically complex areas of construction insurance — and one of the most significant sources of coverage disputes — concerns how defective workmanship and design are treated. The London Engineering Group (LEG) developed three standard clauses that define progressively broader approaches to this exposure.

LEG 1 / 96 — Defects Exclusion

LEG 1 is the most restrictive clause. It excludes the cost of repairing or replacing the defective item itself, and it also excludes any loss or damage that would not have occurred but for the defect. In practice, this clause provides very limited cover for defect-related losses: if a design flaw causes a collapse, neither the repair of the flaw nor the resulting collapse damage is covered.

LEG 2 / 96 — Consequences Covered

LEG 2 excludes the cost of repairing or replacing the defective item itself but covers the resulting damage to other parts of the works. Using the same collapse example: the costs of reinstating the collapsed section are covered, but not the costs of fixing the underlying design flaw. LEG 2 is the most common clause in European construction markets and is the de facto starting point in many Turkish placements.

LEG 3 / 96 — Full Cover Including Improvement

LEG 3 covers both the resulting damage and the cost of improving the defective item — that is, bringing it up to the standard it was always intended to meet. This is the broadest cover available. It is also the most expensive and is typically reserved for high-value or technically complex projects where the design risk is significant. Underwriters may apply a specific deductible or a sub-limit for LEG 3 cover.

The LEG clause chosen significantly affects the insured's net exposure in a defect-related loss. Understanding which clause applies to your project — and negotiating for the appropriate version given the technical complexity of the works — is a material coverage decision, not a boilerplate formality.

Testing, Commissioning and the Maintenance Period

Civil works projects generally end at practical completion: the structure is complete, the keys are handed over, and the construction phase of risk comes to an end. Plant and machinery projects are different. Before a piece of industrial equipment can be accepted by the project owner, it must be tested under operational conditions — sometimes for weeks — and commissioned. During this period, the risk profile changes significantly.

EAR policies typically include a testing and commissioning coverage extension, which responds to losses that occur during the process of bringing equipment under load for the first time. Specific sub-limits and deductibles usually apply to this phase, reflecting the increased risk of mechanical damage during initial runs. The policy must be structured to ensure that the testing period is explicitly included, and that the period of insurance extends to cover realistic testing timelines including any delays.

Following practical completion or commissioning, CAR and EAR policies include a maintenance period — typically twelve months — during which the contractor remains responsible for rectifying defects that manifest in the completed works. The maintenance period section of the policy provides cover for damage caused by the contractor during the course of rectification work and, in some forms, damage arising from a defect in the original works. The scope of maintenance period cover varies significantly between policy forms and should be reviewed carefully against the defects liability provisions of the underlying construction contract.

Turkey's Regulatory Requirements Under SEDDK

Construction insurance in Turkey is regulated by SEDDK under the general framework of the Insurance Law (Law No. 5684) and associated regulations. There is no single mandatory minimum coverage standard that applies to all construction projects, but certain regulatory and contractual requirements create de facto minimum specifications.

Public sector projects procured under Law No. 4734 typically require contractors to maintain project insurance as a condition of contract, with minimum specifications set in the contract documents. Turkish standard construction contracts often reference the FIDIC suite, and FIDIC contracts contain explicit insurance requirements — for the works, for plant and equipment, and for third-party liability — that the construction insurance programme must satisfy.

Local Turkish policy forms used by domestic insurers may differ materially from international (WELCAR, Munich Re, or Lloyd's-based) forms in their treatment of key extensions such as LEG clauses, earthquake cover, and testing and commissioning. A significant domestic limitation that practitioners regularly encounter is the default exclusion of earthquake cover or its inclusion only with tight sub-limits and high deductibles, even for projects in moderate-risk seismic zones. For large or complex projects, international reinsurance capacity accessed through a broker with London market relationships can provide more comprehensive terms than the domestic market alone.

Subcontractor Cover: Who Is Actually Protected?

Construction projects typically involve a main contractor and a web of specialist subcontractors. Determining who is insured under the project's CAR or EAR policy — and what each party's obligations are in respect of their own insurance arrangements — is a common source of confusion and, occasionally, uninsured losses.

Most CAR and EAR policies insure a list of "insured parties" that includes the principal (project owner or developer), the main contractor, and, where specified, subcontractors of all tiers. This principal-insured structure means that when a subcontractor's negligence causes loss, the project insurer responds without the insurer being able to subrogate against the subcontractor (because they are a co-insured). This is usually the commercially desirable outcome — it prevents inter-party litigation between project participants that can be costly and damaging to working relationships.

However, the coverage available under the project policy does not remove the subcontractor's own insurance obligations. A subcontractor's own public liability policy may be required to respond first in certain loss scenarios, and the project policy may sit in excess. Coordinating these coverage layers — and ensuring that subcontractor policies do not contain terms that inadvertently undermine the project programme — requires careful review of the full suite of contracts and insurance documents.

Construction All Risks Is Not Property Insurance

A persistent misconception, particularly among developers who are more familiar with property insurance than construction risk, is that a standard commercial property policy can substitute for a purpose-built CAR or EAR programme. It cannot, and the differences are not cosmetic.

A commercial property policy is designed to cover completed, occupied buildings. It is rated on the characteristics of finished structures: their construction type, fire protection, occupancy, and claims history. It excludes, almost universally, works under construction and the activities involved in constructing them.

A CAR policy, by contrast, is rated on the specific project: its contract value, duration, type of works, site conditions, contractor experience, and the nature of adjacent exposures. It covers the accumulating value of works in progress from day one, including materials on site, temporary works, and the activities of the workforce. It responds to the full range of construction perils — collapse, vibration, floods, human error — that a property policy would simply not contemplate.

The consequences of relying on property cover for a construction project can be severe. In the event of a major loss, the property insurer may decline the claim entirely on the grounds that construction was ongoing. The gap is not one that can be corrected after the fact.

Building a Comprehensive Coverage Programme

A well-structured construction insurance programme for a project in Turkey typically brings together several coordinated elements:

The placement of a construction programme of this scope requires a broker who can access both the domestic Turkish market and, for larger or more complex risks, the international reinsurance capacity available through the London market. Domestic capacity can be well-suited to straightforward residential or commercial developments. For energy infrastructure, specialised industrial facilities, or projects financed by international lenders with their own minimum coverage requirements, international markets provide both the capacity and the technical expertise that the risk demands. To understand how our construction and engineering insurance brokerage services can be structured for your specific project, contact our team for an initial discussion.