What Is Construction & Erection Insurance?
Contractors' All Risks (CAR) and Erection All Risks (EAR) are the two principal all-risks material damage policies used for construction and installation projects. Although often referred to together, they cover fundamentally different types of work: CAR covers civil construction — buildings, roads, bridges, dams, tunnels and earthworks — whilst EAR covers mechanical and electrical installation, including power plant equipment, industrial machinery, manufacturing plant and process equipment.
Both policies cover accidental physical loss or damage to the contract works during the construction period, including damage to temporary works and contractor's plant and equipment on site. Third-Party Liability (TPL) — covering bodily injury or property damage caused to third parties during construction operations — is typically written as Section II of the same policy. The TR market uses internationally recognised wordings including Munich Re JM-001 (for CAR) and JM-002 (for EAR) as well as equivalent London market and Swiss Re standard forms. For large or complex projects, bespoke wordings may be agreed with underwriters.
For projects involving both civil works and mechanical/electrical installation — energy plants, industrial facilities, transport infrastructure — a combined CAR/EAR policy is placed, covering the entire project under a single programme. Neolife coordinates combined placements for major Turkish infrastructure and industrial projects, working with domestic and international insurers to deliver programme structures that satisfy lender, principal and contractor requirements alike.
Section I — Material Damage
Section I of a CAR or EAR policy covers physical loss or damage to the insured works from any accidental cause not specifically excluded. The all-risks basis means the insured does not need to prove the cause of loss — only that a loss has occurred and that it is not excluded.
What Section I Covers
- The permanent contract works — the completed structure, installed plant or building under construction
- Temporary works — scaffolding, falsework, cofferdams, temporary access roads
- Materials and components awaiting incorporation into the works, on site or in a designated storage area
- Contractor's plant and machinery on site (construction equipment, cranes, generators)
- Surrounding property of the principal if expressly included in the schedule
Principal Perils Covered
- Fire and explosion
- Flood, storm, lightning and natural catastrophe
- Collapse and subsidence
- Accidental damage during handling and installation
- Theft of materials from site
- Impact by third-party vehicles
Standard Exclusions — Note
Standard CAR/EAR wordings exclude damage to the defective part itself arising from faulty design, workmanship or materials. They also exclude normal wear and tear, gradual deterioration, wilful damage and consequential losses not directly covered as DSU/ALOP. The DDE extension (see below) can partially or fully re-instate cover for defect-related losses, but the scope of the extension depends on the LEG clause level agreed.
Section II — Third-Party Liability
Section II covers the legal liability of the insured parties for accidental bodily injury or property damage caused to third parties — persons or property not forming part of the project itself — as a result of construction operations.
The Section II limit is set on a per-occurrence basis. It covers claims brought by members of the public, neighbouring property owners and utilities affected by construction activities. It does not cover:
- Liability between the principal and the main contractor (this is a contractual relationship governed by the construction contract, not tort)
- Property belonging to or in the custody of any insured party
- Liability arising from professional design services (addressed under Professional Indemnity)
- Employer's liability for construction workers (addressed under a separate workers' compensation / occupational accident policy)
For projects in urban areas or adjacent to existing infrastructure — roads, utilities, occupied buildings — adequate Section II limits are critical. The sum required depends on the density of surrounding development, the nature of operations and any contractual minimum liability requirements imposed by the principal or public authority granting permits.
Delay in Start-Up (DSU) / Advance Loss of Profits (ALOP)
DSU and ALOP are two names for the same coverage concept: financial loss to the project owner (the principal or tesis sahibi) arising from delay to the commercial start-up of a revenue-generating project caused by an insured Section I material damage event.
Consider a power plant scheduled to commence generating revenue on a specific date. If a flood damages the substation during construction and the opening date is pushed back by five months, the principal loses five months of anticipated revenue and may face increased financing costs on outstanding construction loans. Neither Section I (which covers repair costs) nor Section II (third-party liability) responds to this financial loss. DSU/ALOP is the specific coverage that does.
Key DSU Parameters
Indemnity period: typically 12–24 months, representing the realistic maximum delay to start-up following a major loss event. Set conservatively to ensure adequate cover.
Maximum daily indemnity: the insured's anticipated daily revenue or net profit from the project, agreed at policy inception with supporting financial projections.
Waiting period (deductible): the number of delay days before DSU cover attaches. Commonly 30, 60 or 90 days.
When DSU Is Critical
DSU is most important for projects where delayed opening has direct, quantifiable financial consequences:
— Power plants (loss of generation revenue and feed-in tariff income)
— Commercial real estate (loss of rental income)
— Manufacturing facilities (loss of production revenue)
— Hotels and hospitality (loss of occupancy revenue)
— Toll roads and bridges (loss of toll income)
Lenders financing such projects frequently require DSU/ALOP as a condition of the project finance facility.
Defective Design, Workmanship & Materials — DDE Extension (LEG Clauses)
A standard CAR/EAR policy excludes damage to the defective part itself — the structural element, component or material that was itself faulty. This is the standard exclusion for damage arising from defective design, defective materials or defective workmanship (collectively referred to as "DDE"). However, it is possible to extend cover to include some or all of this exposure through the DDE extension, which in international practice is most commonly structured using the LEG (London Engineering Group) clause scale.
| LEG Clause | Common Name | What It Covers | Typical Use |
|---|---|---|---|
| LEG 1/96 | Narrow / Exclusion Only | Excludes damage to the defective part only. Damage caused to surrounding works by the defect is covered. | Standard on most CAR/EAR policies without DDE extension |
| LEG 2/96 | Partial / Consequences | Excludes the defective part and the cost of improving it. Covers damage to surrounding or resultant works from the defect event. | Commonly required by lenders and sophisticated principals on medium-to-large projects |
| LEG 3/96 | Broad / Full Defects | Covers damage to the defective part and surrounding works. Only excludes the cost of improving the original design. | Power plants, complex industrial installations; required by some project finance packages |
The appropriate LEG clause for a project depends on the contract requirements, the lender's minimum insurance specifications and the risk appetite of the principal. LEG 3 cover commands a higher premium than LEG 1 or LEG 2. Neolife advises clients on the appropriate clause level and negotiates DDE/LEG terms with underwriters as part of programme placement.
Testing & Commissioning
The testing and commissioning (T&C) period is the phase between physical completion of the works and formal handover to the principal. During T&C, the plant or facility is first brought into operational conditions — machinery is run under load, systems are tested against design specifications, and the contractor demonstrates performance in accordance with the contract.
From an insurance perspective, T&C is a transitional and higher-risk phase: the works are essentially complete but the operating risks of a live plant are now present, in addition to residual construction risks. Standard EAR and combined CAR/EAR policies include T&C cover as an extension, typically for a defined period of 30, 60 or 90 days from the commencement of testing. The cover is subject to an adjusted deductible reflecting the increased risk during this phase.
Important: Notifying the Commencement of T&C
Most policies require written notification to the insurer before the commencement of testing and commissioning. Failure to notify can affect the validity of cover during the T&C phase. Neolife manages this notification process on behalf of clients as part of project insurance administration, ensuring continuity of cover at this critical project milestone.
If testing reveals a fault requiring remediation and re-testing, the T&C period may need to be extended. Policy provisions for T&C period extensions should be agreed with underwriters at the time of placement, rather than negotiated retrospectively under time pressure. For large or complex plants — power stations, refineries, industrial process plants — a longer T&C period of 90 days or more is standard.