CAR or EAR? That is the first question to answer
The project type determines the choice of insurance. For mixed EPC projects the dominant activity type is decisive; EAR is typically preferred. In mixed projects, scope boundaries must be explicitly stated in the policy wording.
| Project / Activity Type | CAR | EAR | Note |
|---|---|---|---|
| Residential / commercial building construction | CAR | — | Standard CAR cover |
| Bridge, viaduct, tunnel, dam | CAR | — | Infrastructure construction |
| Road, motorway, railway | CAR | — | Infrastructure construction |
| Industrial plant, factory | — | EAR | Predominantly machinery erection |
| Power station, turbine installation | — | EAR | Electro-mechanical dominant |
| Steel structure / storage tank | — | EAR | Metal erection |
| Onshore pipeline | Project-specific | Project-specific | Depends on construction vs. erection weight |
| EPC — mixed construction + erection | — | Typical EAR | Dominant activity points to EAR |
| HVAC / electrical infrastructure (ancillary work) | CAR sub-cover | — | CAR if part of a building contract |
| Renewable energy (wind, solar) | Project-specific | Typical EAR | Turbine / panel installation dominant |
Mixed-project risk: For projects that combine construction and erection activities, which policy (CAR / EAR) applies and where the scope boundaries lie must be clarified before works begin. Disputes at the time of a loss significantly extend the claims settlement process.
Does "All Risks" mean everything is covered?
All Risks means that the types of risk covered need not be listed in advance. The loss is presumed to arise from a sudden and unforeseen event; the insured is not required to prove the cause of the loss beforehand (unlike a named-perils policy). This broad evidential advantage explains the value of the All Risks term.
However, this does not mean cover is unlimited. Standard exclusions, sublimits and deductibles shape the policy.
What is and is not covered under All Risks?
Typically within scope
- Fire, explosion
- Storm, flood, inundation (sublimit)
- Earthquake (sublimit)
- Lightning strike
- Workmen's error, negligence
- Third-party action (vandalism)
- Theft (subject to conditions)
- Subsidence, foundation movement (subject to conditions)
- Testing & Commissioning period loss (extension required)
Standard exclusions
- Normal wear and tear
- Wilful damage or neglect
- War, civil war, insurrection
- Nuclear risk
- Defective design, material or workmanship (LEG clause limits apply)
- Losses falling below the deductible
- Liquidated damages / delay penalties (LD — DSU separate)
- Operational loss (use during maintenance period)
- Professional negligence / PI (separate policy)
The section structure of a CAR / EAR policy
A standard CAR / EAR policy consists of two compulsory sections and optional sections. Each section has its own sum insured, its own deductible and its own limits.
- The construction / erection works themselves
- Sum insured: contract value (including VAT and escalation)
- Temporary works
- Site facilities and equipment (subject to conditions)
- Existing structures (extension required)
- Debris removal costs
- Defects Liability Period (DLP) cover
- Bodily injury to third parties
- Property damage to third parties
- Adjacent property damage in the site vicinity
- Defence costs
- Liability of the project owner and contractor
- Damage to existing structures (separate limit required)
- Acts of subcontractors (subject to conditions)
- Contractors' Plant & Equipment / Machinery
- Construction plant and machinery used on site
- Crane, excavator, generator, etc.
- Sum insured: replacement or market value
- Hire charges may be included subject to conditions
- Delay in Start-Up / Advanced Loss of Profit
- Revenue loss due to project delay caused by material damage
- Financing costs, rental income loss, sales loss
- Material damage under CAR/EAR is a prerequisite trigger
- Cannot be activated independently
- Maximum Indemnity Period specified in the policy
LEG / DE clauses: indemnity limits for defective design
For losses caused by defective design, material or workmanship, the scope of indemnification under a CAR/EAR policy is determined by the LEG (London Engineering Group) or DE (Defects Exclusion) clause. The clause that applies can radically change the indemnity amount on a large loss.
Most Restrictive Cover
The part or component that itself has the defective design, material or workmanship.
The portion of the damage from the defective part that has spread to other structural elements.
Intermediate Cover
The additional cost required to improve upon the original design.
The repair cost required to reinstate or replace the damaged parts.
Broadest Cover
Only the additional cost incurred to improve the original design beyond its original purpose.
The full extent of loss arising from defective design, including broad repair and reconstruction costs.
Negotiation point: On large projects, LEG clause selection is directly linked to the premium differential. LEG 3 offers broader cover and exerts upward pressure on premiums. Before works begin, it must be verified that the clause required in the contract aligns with the clause applied in the policy, particularly in EPC and design-and-build models. Note also that a CAR/EAR indemnity for a design defect does not substitute for Professional Indemnity (PI) insurance covering professional negligence.
Existing Structures and surrounding property damage
A CAR/EAR policy covers the project that is the subject of the insurance. Existing structures in the site vicinity that are not part of the project (existing buildings, factories, bridges, infrastructure) are not automatically included in the standard cover.
- Existing Structures extension: An additional extension must be obtained to include existing structures under Section I cover. The sum insured is set on the basis of the reinstatement value of those structures.
- Third-party liability: If an existing structure belongs to a neighbour and is damaged by site activity, Section II (TPL) may respond; however, the limit must be set in proportion to the project.
- Risk: Where an expansion is being built within an existing factory and site damage spreads to existing production equipment, the distinction between covers is critically important.
Critical check: Does the contract require the project owner to insure the existing structures? Starting construction without reflecting this obligation in the policy creates serious problems with both the project owner and the insurer.
Defects Liability Period (DLP), Testing & Commissioning
Defects Liability Period (DLP)
The defects liability period begins after provisional acceptance and is typically set at 12–24 months in the contract. Losses caused during this period by latent defects arising from construction or erection activities may be covered under the DLP extension.
- Routine maintenance, regular repairs and wear and tear remain excluded during this period.
- The DLP cover generally applies to losses caused by the contractor's own fault — losses from natural catastrophes are assessed separately.
- The DLP starts from the date of provisional acceptance, not the policy expiry date; a mismatch between the two can create a coverage gap.
Testing & Commissioning
In EAR policies, keeping the Testing & Commissioning period within scope is particularly important.
- Cold testing: Mechanical checks on machinery or plant without energisation. Generally included within standard EAR cover.
- Hot testing / full-load commissioning: Tests carried out under energy with real operating conditions. Losses occurring during this period may fall outside standard cover; a separate Testing & Commissioning extension must be added to the policy.
- The start and end dates of the test period must be explicitly defined in the policy.
Earthquake, Flood and Natural Catastrophe Sublimits
Catastrophic natural perils such as earthquake and flood are included within All Risks cover but are generally subject to a sublimit. This sublimit may be well below the total policy sum insured.
| Risk / Event | Within cover? | Typical Structure | Note |
|---|---|---|---|
| Earthquake | Yes (sublimit) | Separate sublimit or deductible | Sublimit may be low in high seismic zones |
| Flood / inundation | Yes (sublimit) | Separate sublimit or deductible | High deductible in flood-prone areas |
| Storm / hurricane | Yes | Subject to general deductible | Elevated risk at coastal or exposed sites |
| Landslip / avalanche | Conditional | Geotechnical risk assessment required | May be excluded in certain geographies |
| Landslide / ground settlement | Conditional | Depends on project and soil investigation | Policy wording must be clarified |
Earthquake sublimit in Türkiye: Much of Türkiye lies in a high seismic risk zone. The earthquake risk zone of the project location directly affects the sublimit amount and the deductible rate. For large-scale construction where the project value is substantial, the adequacy of the earthquake sublimit must always be tested.
Deductible Structure
In CAR/EAR policies a separate deductible applies to each loss event. Deductibles vary by risk type and cause of loss.
| Loss Type / Section | Typical Deductible Structure | Note |
|---|---|---|
| Section I — General material damage | Fixed amount or percentage of contract value | Scales with project size |
| Section I — Earthquake damage | High — separate deductible | Determined by seismic zone |
| Section I — Flood / inundation | High — separate deductible | Subject to flood risk assessment |
| Section I — Defective Design/Material (LEG) | Separate deductible linked to LEG clause | Typically higher for LEG 3 |
| Section I — Testing & Commissioning | Separate and higher deductible | High-risk profile period |
| Section II — Third-party liability | Fixed amount (lower) | May differ for bodily injury |
| CPE / CPM — Plant & machinery | Fixed amount per machine | Applied separately for each item |
| DSU / ALOP | Waiting period (days) | Typically 14–30 working days; shorter period at additional premium |
Deductible and project cash flow: On large construction projects the deductible amount payable on each loss directly affects cash flow. In project finance structures, the bank or lending institution may require the deductible amount to be held in a blocked guarantee account.
Delay in Start-Up / Advanced Loss of Profit (DSU/ALOP): Revenue Loss Insurance for Project Delays
DSU (Delay in Start-Up) or ALOP (Advanced Loss of Profit) is a complement to the CAR/EAR policy. It protects against revenue loss arising when an insured material damage event delays the project's planned start-up date.
Material Damage Covered under CAR/EAR
DSU/ALOP cannot be triggered independently. A material damage event indemnifiable under the CAR/EAR policy must first occur and be proven to have caused the delay.
Postponement of the Planned Start-Up Date
The repair of the damage pushes back the project start-up date. After the waiting period has elapsed, the revenue loss is calculated for each day / week of delay.
Revenue Loss Indemnification
Lost sales revenue, lost rental income, financing costs, fixed operating expenses. The Maximum Indemnity Period is specified in the policy.
Calculating the DSU/ALOP Sum Insured
The DSU/ALOP sum insured is calculated on the basis of the projected monthly / annual revenue expected once the project is operational, multiplied by the agreed Maximum Indemnity Period. An incorrectly set sum insured can result in an inadequate settlement at the time of a claim. Revenue projections and bank financing documents must be reviewed together.
Frequently overlooked: DSU/ALOP cover only responds to delays caused by a loss event covered under CAR/EAR. Delays caused by a subcontractor, supply chain disruption or the project owner are outside the scope of DSU/ALOP. These exclusions must be evaluated alongside the risk allocation in the project contract.
Temporary works, site facilities and debris removal
Temporary Works
Structures erected to support the construction of the project but not forming part of the permanent works — scaffolding, formwork, shoring systems, temporary bridges. May be included within standard CAR/EAR cover; however, they must be included in the sum insured calculation.
Site Facilities
Temporary structures used on site such as container offices, stores and welfare facilities. Must be included in the sum insured calculation; otherwise they will not be reflected in the claims settlement.
Debris Removal Costs
Costs of clearing and removing debris following a loss. Standard policies apply a sublimit; on large projects this limit may prove insufficient. Additionally, contaminated ground clean-up (contamination) is generally excluded.
CPE / CPM — Plant & Machinery
Construction plant operating on site (cranes, excavators, concrete pumps) is insured as an optional section. The replacement or market value is declared for each machine. CPE cover can also be taken independently of the CAR/EAR policy.
How is the Sum Insured determined?
In a CAR/EAR policy, an inadequate sum insured results in a proportional reduction (average / co-insurance penalty) being applied at the time of a loss. Setting the correct sum insured is critical both at policy inception and throughout the project.
- Section I — Contract value: The total project contract value including VAT. This may change; the updating mechanism must be written into the policy.
- Escalation / price increases: On long-duration projects, material price inflation may exceed the contract value. An escalation provision must be included in the sum insured or an automatic increase clause added.
- Temporary works and site facilities: Must be included in the sum insured.
- Existing structures: Separately declared and separately insured.
- Section II (TPL) limit: Must be set proportionately to the project size, urban / industrial location, and surrounding exposures; must meet minimum statutory obligations.
- DSU/ALOP: Based on the project's revenue projection and the maximum indemnity period.
Underinsurance penalty: If the sum insured is found to be below the actual project value at the time of a loss, the insurer will reduce the indemnity proportionally. The scenario "the project grew but we forgot to update the policy" is a frequently encountered risk — interim revisions are essential whenever scope changes occur.
What Documents Does an Underwriter Require?
For a CAR/EAR quotation to be assessed quickly and accurately, the underwriter will request the information and documents listed below. Having this list ready before quotation discussions significantly accelerates the process.
Project Description
Parties and Contract
Technical Documents
Cover and Limit Requirements
Risk Management
The distinction between CAR/EAR and Professional Indemnity (PI)
A CAR/EAR policy covers physical damage arising from the construction or erection activity itself, and third-party bodily injury / property damage. Financial liability arising from a designer's, consultant's or engineering firm's professional errors and omissions requires a separate Professional Indemnity (PI) policy.
- Where an EPC contractor assumes responsibility for both design and construction, both CAR/EAR and PI policies may be required.
- If a design error causes physical damage, the LEG clause determines the scope of CAR/EAR indemnity; however, for financial loss caused to the client by the designer, the PI policy responds.
- Coverage gaps and overlaps between the two policies require a coordinated review of policy wordings.