engg,pg,module ii, iii, car, ear, 29-08-15,pdf

Prof. Anupam Suri (9810624914)

Fellow & Double Associate in Insurance (India); CPCU, AINS, HISC & TTT (U.S.A.); IF1 (U.K.)

ENGG/HANDOUT - 2

CONTRACTOR’S ALL RISKS POLICY (CAR)

There is a need for projects in a country for various reasons like:

For new production facilities

To improve/enhance existing production facilities

To improve/enhance infrastructure

Contractor’s All Risks policy is commonly called CAR policy. It is designed to protect interests of

contractors & principals engaged in projects majorly involving the civil construction work.

The examples of civil construction projects include construction /renovation of:

Residential buildings

Hospitals

Factory buildings

Roads

Bridges

Flyovers

Tunnels

Railway stations, etc.

The insured contract works includes all the operations to be carried out by a contractor as per the

contract.

CAR insurance provides Comprehensive cover for the entire project majorly involving the civil

engineering work from time of arrival of first materials at site till the work is over. It may also cover

risk during maintenance period (after project is over) at the option of insured for which an

additional premium is charged.

The policy provides ‘All Risk’ cover for sudden & unforeseen losses. But ‘All Risk’ cover does not

mean covering all the perils. Rather it means loss/damage from covering all the perils EXCEPT those

specifically excluded in the policy.

The property covered includes property related to the complete project at the project site during

storage & construction including materials & supplies.

The entities that can be insured covered includes:

Principals (owners)

Contractors

Sub-contractors



The CAR policy can also be issued in joint names of Principal & Contractors.

CAR COVERAGE:

The policy provides coverage under two sections:

Section I – Material damage

Section II – Third party liability (TPL)


This section coves loss/damage to the property of project. It is a comprehensive

cover on ‘All Risk’ basis. It covers sudden & unforeseen loss/damage to the insured

property from any cause EXCEPT the. specified exclusions

The examples of covered perils under Section I – Material damage include:

Fire & allied perils

Theft, burglary

Collapse, collision, Impact

Flood, storm & allied perils

Accidental loss/damage during construction due to:

Falling, dropping

Lack of skill

Negligence

Human error

Malicious act

Defective workmanship

Defective material (But the cost of defective material itself is not covered)

(Note: ‘Faulty design’ is not covered as it is specifically excluded)


Section II covers insured’s legal liability to third parties for their injury /property

damage caused by activities related to the insured project.

EXCLUSIONS UNDER CAR POLICY

The cover is subject to a few exclusions as specified in the policy. These fall under the

following three categories:

General exclusions (for both section I & II)

Exclusions applicable to section I only

Exclusions applicable to section II only

General exclusions (for both section I & II): These include:

War, civil commotion

Nuclear reaction, radiation, radioactive contamination



Wilful act of insured or his representative

Wilful negligence of insured or his representative

Cessation of work (totally or partially)

Exclusions to section I only (Material damage)

Excess

Loss discovered during inventory only

Wear & tear; Gradual deterioration due to atmospheric conditions, Rust

o Scratching of painted/polished surface

Breakage of glass

Loss due to faulty design (Note: Loss due to defective workmanship or material is

covered)

Defective material itsef (i.e. cost of replacement of Defective material itself is not

covered. Other losses to property caused due to the defective material are covered)

Cost of correction of error unless resulting in physical damage

Files, drawings, currency, cheques, stamps, deeds, etc.

Loss to packing material (Crates, boxes, etc.)

Loss to Vehicles licensed for general road use

Loss to Waterborne Vessels or machinery thereon

Loss to Aircraft

Consequential losses

Penalties

Exclusions to section II only (TPL)

Excess

Injury/illness of employees or workmen of insured or family members

Property of insured/his employees (own property)

Accident caused by vehicles licensed for general road use or by Waterborne Vessels

or Aircraft

PERIOD OF CAR INSURANCE:

FROM: Commencement of work OR time of arrival of first consignment of materials at the site,

whichever is earlier

TILL: Construction work is Completed/taken over by principal OR policy expiry date, whichever

is earlier

(Note: Premium is calculated from the time of arrival of first consignment of materials at the site

even if insurance is requested at a later stage).



Phased handing over:

Sometimes the project work is done in a phased manner. In such cases, the insurer’s

liability ceases for that part of the work that is put into use or taken over by the

principal, while the cover continues for the remaining work.

MAINTENANCE PERIOD COVER:

The contractor can also take cover for the Maintenance Period (after completion of

construction work) to fulfil the obligations as per the contract of maintenance.

This period is also called ‘Defects Liability period’.

Generally the Maintenance Period is for 12 months. But it may vary for different types of

contracts.

There are two types of Maintenance cover as follows:

Maintenance visits cover (or Limited Maintenance cover)

Extended Maintenance cover

Maintenance visits cover (or Limited Maintenance cover):

It covers losses to the contract work caused by the insured contractor solely

during course of operations carried out under maintenance contract.

Extended Maintenance cover:

It covers:

Losses to the contract work caused by the insured contractor during course of

operations carried out under maintenance contract

PLUS

Losses occurring during maintenance period, though caused at the site during

construction period.

The CAR policy must separately show the Construction Period and the Maintenance Period.

EXAMPLE: Under CAR policy, the first material reached at the insured site of construction

on 15th July 2015. The expected period of the project is 20 months. The insured also wants

maintenance cover for 6 months. The insurance period will be mentioned in the policyas

follows:

Construction period: 15-07-2015 to 14-03-2017 (20 months)

Maintenance period: 6 Months



CASE STUDY 1 ON MAINTENANCE PERIOD COVER:

Given below are the details of CAR coverage:

Construction period: 24 months (15-02-13 to 14-02-2015)

Maintenance period: 6 months

The project work was completed and handed over to the principal on time. The contractor

visited the completed site on 10-05-2105 and found one of the pillars was in a bent position.

The contractor started its repair to correct the fault. While repairing it, pillar along with a part of

the building collapsed.

Question:

The subject damage due to collapse will be covered under:

a. Maintenance visits cover

b. Extended Maintenance cover

c. Both Maintenance visits cover & Extended Maintenance cover

d. Under none

Answer: c. Both Maintenance visits cover & Extended Maintenance cover

CASE STUDY 2 ON MAINTENANCE PERIOD COVER:

Given below are the details of CAR coverage:

Construction period: 24 months (15-05-2-13 to 14-02-2015)

Maintenance period: 6 months

Project work was handed over to principal on 14-02-2015.

A few days later on 20-02-2105, principal found that from a part of building the plaster was

coming off and a crack could be seen

During survey it was discovered that there was a crack on the wall.

On going through the relevant documents it was found that this crack had developed about 2

months back but was not mended it was of very small size.



Question:

The subject damage will be covered under:

a. Maintenance visits cover

b. Extended Maintenance cover

c. Both Maintenance visits cover & Extended Maintenance cover

d. Under none

Answer: b. Extended Maintenance cover

EXTENSION OF INSURANCE PERIOD:

• Many a times the project is not completed on time and is delayed. The original policy period can

be extended at the insured’s request on payment of additional premium. The additional

premium depends on the length of the extension period.

SUM INSURED

Insured has to declare sum insured separately for:

Material damage section and

TPL section (if opted)

The sum insured must represent the estimated complete erected value of project.

For section I, the completed erected value includes items like:

Cost of materials

Wages

Freight

Custom duties

Items supplied by principal, etc.

The values for the sum insured should represent the current new replacement costs of the

items.



CASE STUDY ON SUM INSURED:

A residential building is to be constructed and the erection of the building is to be covered under

Contractor All Risk (CAR) policy. The details of the components of the project cost are as under:

Value (in Rs. Crores)

Cost of materials : 160.00

Freight : 4.00

Custom duty (for imported materials) : 30.00

Labour/wages : 80.00

TPL cover : 5.00

What will be the sum insured for Material Damage (Section I)?

Answer: The sum insured for Material Damage (Section I) = Rs. 274 Crores (160 + 4 + 30 + 80)

The sum insured for TPL (Section II) = Rs. 5 Crores

Revision of sum insured:

In case of any change in certain costs during the policy period leading to change in

estimated project value, the S.I. can be increased or decreased.

The premium calculation for the revised is for the entire policy period since

inception date (and not pro-rata from date of revision to expiry date).

CASE STUDY ON REVISION OF SUM INSURED:

The construction of a residential building is covered under a CAR policy. The details are as

follows:

Sum insured for Material Damage Section = Rs. 20,00,00,000

Policy period: 15-06-2014 to 14-06-2016 (24 months)

Premium rate for 24 months: Rs. 2 %0

Premium charged: Rs. 4,00,000

Due to increase in custom duty from July 2015, the insured wants to increase S.I. by Rs. 1

crore w.e.f. 15-07-2014 making it to Rs. 21,00,00,000.

What will be the additional premium?

Solution:

Premium on increased S.I. of Rs. 1 crore is calculated for the entire period, i.e. from

inception date till expiry for 24 months (and not from 15-07-2014 for 11 months)

Hence, additional premium charged = 2 %0 of Rs. 1,00,00,000

= Rs. 20,000



AVERAGE CLAUSE (IN CASE OF UNDERINSURANCE):

At the time of loss, if there is underinsurance, i.e. sum insured is less than actual amount

required for insurance; the recoverable loss amount is proportionally reduced by applying the

formula for average.

(Note - This ‘average’ is not the arithmetical average)

Average clause is applicable for Section I (Material damage section). There is no average clause

applicable in case of Section II (TPL cover).

Formula for Average:

Sum insured

Claim amount payable = ----------------------------------------------------- X Assessed loss amount

Actual amount required for insurance

CASE STUDY 1 ON AVERAGE:

Please read the following details:

S.I. of project = Rs. 1,00,00,000

Assessed amount of loss = Rs. 30,00,000

Value of complete project on date of loss = Rs. 1,50,00,000

Whether average is applicable or not and how much claim amount is payable?

Solution:

As S.I. is less than the value of project on date of loss, there is underinsurance. Hence, average

is applicable.

The claim amount payable = (S.I. / Actual value on date of loss) X Assessed amount of loss

= (1,00,00,000/1,50,00,000) X 30,00,000

= Rs. 20,00,000

CASE STUDY 2 ON AVERAGE:

Please read the following details:

S.I. of project = Rs. 2,00,00,000

Assessed amount of loss = Rs. 30,00,000

Value of complete project on date of loss = Rs. 1,75,00,000

Whether average is applicable or not and how much claim amount is payable?

Solution: As S.I. is not less than the value of project on date of loss, there is no underinsurance.

Hence, average is not applicable. Hence full assessed loss amount payable = Rs. 30, 00,000



ADJUSTMENT OF SUM INSURED OF MATERIAL DAMAGE (SECTION I):

The sum insured of material damage section is adjustable at end of policy period. At policy inception,

the sum insured is declared on the basis of the estimated project value. Hence, initially provisional

premium is charged. Only on project completion, the insured knows the actual project value which is

declared to the insurer. Hence, the sum insured is adjusted at the expiry of the policy period or

completion of construction work.

The insured is required to declare the actual value of the completed project on which final premium is

calculated. On adjustment, either additional premium is charged or excess premium is refunded.

But no adjustment of the sum insured is made because of any change in the prime costs of the

materials. The sum insured is adjustable on the basis of actual expenses towards the following items on

completion of the project:

Wages,

Freight,

Custom Duties, etc.

SUPPLEMENTARY COVERS

Several following supplementary covers can be taken by insured under CAR policy on payment

of the additional premium:

TPL cover (under Section II)

Maintenance cover

Construction Plant & Machinery (CPM) Cover

Removal of Debris

Overtime, express freight, etc.

Air freight

Additional custom duty

Temporary works/structures

Escalation

The above supplementary covers are taken as extensions under the CAR policy through

endorsements. For each supplementary cover, a separate ‘limit of insurance’ is to be selected by

the insured. The limits are expressed as amounts in rupees and or as a percentage.

For example, TPL cover (Under Section II) for Rs. 20,00,000

Removal of Debris cover for Rs. 5,00,000

Escalation for 5% of S.I. (Section I)

`

TPL COVER:

Sum insured for TPL Section: A separate sum insured is to be selected by insured for this

section. This sum insured represents the insurer’s limit of TP liability. This cover is granted for



the third party liability arising out of the project work. It covers insured’s liability from accidental

injury to third party person &/or damage to third party’s property.

The TPL coverage is subject to the following limits specified in the policy:

Any one accident (AOA) limit (all liabilities from single accident)

Any one period (AOP) limit (cumulative amount from all liabilities from all

accidents occurring during policy period)

Generally, there is a cap on maximum TPL limit for which cover can be taken under CAR policy.

In case insured wants cover for more than that amount, it can be taken under a separate TPL

policy under miscellaneous department.

For TPL cover, the rate applicable is 100% of the basic CAR rate (i.e. same rate).

There is no average clause applicable in case of TPL cover.

CONSTRUCTION PLANT & MACHINERY (CPM) COVER:

This cover is granted for the construction plant & machinery to be used at the project site.

The construction plant & machinery is covered on new replacement value basis.

It excludes damage directly by its own mechanical or electrical breakdown or derangement.

Like for TPL cover, there is a maximum limit up to which this cover can be taken under CAR

policy. For the amount beyond the prescribed limit, the insured needs to take a separate CPM

policy as per rate & excess of the CPM policy.

SURROUNDING PROPERTY COVER:

During erection/construction of the insured items, there is a possibility of damage to the

insured’s other property not related to the insured project work.

It covers damage to insured’s other property lying at or adjacent to project site and belonging to

or held in care, custody or control of the principal or the contractor. A separate sum insured to

be mentioned for covering this property.

For surrounding property, the rate applicable is 50% of the basic CAR rate.

CLEARANCE & REMOVAL OF DEBRIS

It covers cost of removal of debris of insured property damaged due to insured perils. This cost

is payable if claim for property damage is otherwise payable. It is to be covered against separate

sum insured.

For this cover, the rate applicable is 100% of the basic CAR rate (i.e. same rate).

ESCALATION

It increase the sum insured by the percentage of escalation chosen. For ascertaining

underinsurance after a loss, the actual value of the complete project is compared with the sum

insured with escalation amount.

The premium for escalation is calculated by applying the basic CAR rate on 50% of escalation

amount.



CASE STUDY 1 ON PREMIUM CALCULATION:

The details given are as below:

Project Sum Insured : 2,00,00,000

Surrounding property S.I. : 5,00,000

Basic CAR rate : 4%o

Calculate basic premium and premium for surrounding property cover.

Premium on project value = Rs. 80,000 (4%o on 2,00,00,000)

Premium on Surrounding property = Rs. 1,000 (2%o on 5,00,000, 2%o being 50% of basic rate

of 4%o)

CASE STUDY 2 ON PREMIUM CALCULATION:

The details given are as below:

Project Sum Insured : Rs. 6,00,00,000

Escalation : 10%

Basic CAR rate : 2%o

Calculate basic premium and premium for surrounding property cover.

Premium on project value = Rs. 1,20,000 (2%o on 6,00,00,000)

(Escalation amount = 6,00,000 (10% of 6,00,00,000)

Premium on escalation amount = Rs. 600 (2%o on 3,00,000 being 50% of 6,00,000)

EARTHQUAKE COVER:

There are 4 earthquake zones:

ZONE – I (Most earthquake prone zone)

ZONE - II

ZONE - III

ZONE – IV (Least earthquake prone zone)

For the risks situated in zone – III or IV, the earthquake cover is automatic under CAR policy.

For risks situated in zone – I or II, the earthquake cover is not automatic and is optional for

insured. The insured may choose to cover it by paying additional premium.



PREMIUM RATE CALCULATION

The CAR rates depend on the following:

Type of project work (like Residential building, Underground works, tunnelling,

pipelines, Hydro-electric work, road construction, bridge construction, wet risks, etc.)

Height of buildings (No. of storeys)

Type of construction of buildings (RCC construction or Non-RCC construction)

Period of project insurance

Location of project site (for earthquake cover, there are different rates for areas falling

under different earthquake zones)

CAR premium rates are indicated as follows:

Type of Risk (Project work) First 3 months rate (consolidated rate)

Beyond 3 months (per month rate)

Warehouses – RCC construction 1.50 %o .02

Warehouses – Other than RCC 1.70 .02

Roads – In township 1.50 .03

Roads – In hill areas 2.25 .02

Case Study 1 on Premium Calculation:

For Warehouses – Other than RCC construction, the per mille (%o ) rates are as follows:

First 3 months rate : 1.70

Beyond 3 months : 0.02

If Policy Period is 16 months, calculate the Basic CAR rate.

Solution:

First 3 months rate = 1.70

Balance 13 months rate = 0.26 (13 X .02 = 0.26 as the rate for ‘Beyond 3 months’ is per month rate)

Basic CAR rate = 1.96 (1.70 + 0.26 = 1.76)

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For Warehouses – RCC construction, the per mille (%o ) rates are as follows:



If Policy Period is 18 months, calculate the Basic CAR rate.

Solution:

First 3 months rate = 1.50

Balance 15 months rate = 0.30 (15 X .02 = 0.30 as the rate for ‘Beyond 3 months’ is per month rate)

Basic CAR rate = 1.80 (1.50 + 0.30 = 1.80)




For Warehouses – RCC construction, the per mille (%o ) rates are as follows:



Policy Period : 2 months

Calculate the Basic CAR rate.

Solution: For any period up to 3 months, the rate applicable will be the rate of the first 3 months, i.e.

1.50%o in this case.

Oooooooooooooooooooooooooooooooooooo

EXCESS

It is the first amount of the loss which is borne by the insured and is not paid by the insurer. This is

mainly to avoid small losses.

In CAR policy, there is separate excess for the following:

Storage and construction claims

Maintenance period claims

‘Major Perils’ Claims

‘Major Perils’ Claims include:

1. AOG (Act of God perils) claims - Earthquake, Landslide, Rock-slide, Storm, Flood, Inundation

2. Collapse

3. Water damage for wet risks i.e. works in rivers, canals, lakes or sea

Example of normal compulsory excess:

For construction of residential buildings (hypothetical figures):

Storage and construction claims: Rs. 10,000

Maintenance period claims: Rs. 20,000

‘Major Perils’ Claims: 5% of claim amount subj to minimum Rs. 50,000

Two types of Excess:

Minimum compulsory excess

Voluntary (Higher) excess

Minimum compulsory excess: It is the minimum amount of excess prescribed by

the insurer

Voluntary excess: It is the higher than the normal amount of excess that can be

opted by the insured. The insured is given discount in the premium on opting for the

voluntary excess. For example:

o 2 times the minimum excess: 5% discount in premium

o 5 times the minimum excess: 10% discount in premium



o Above 100 the minimum excess: 55% discount in premium

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HIGH VALUE PROJECTS

The CAR policy wordings are standardized. But high value projects like, projects with value being more

than Rs. 2500 crores, these are exempted from using standard wordings. The insurers may make

reference to the reinsurers for special rates, terms, conditions, etc.

POLICY CONDITIONS

Some of the policy conditions are as follows:

Notification of any material change in the risk to be immediately given to the insured

and and payment of additional premium to be made if required by the insurer.

Notice of claim to be given within 14 days of the loss.

Insurer’s rights of recovery (under subrogation) must be preserved by the insured.

Contribution will be applicable, if the loss is covered under more than one policy by

different insurers.

The differences regarding amount/quantum of claim are to be submitted to arbitration

(provide the claim is otherwise payable).

If the claim is found to be fraudulent, all benefits under the policy are forfeited.

Basis of Indemnification:

The loss may be of the following types:

Partial loss (repair of damaged item can be done)

Total loss

Total Loss may be of following types:

Repair cannot be done

Item stolen/misplaced

Constructive total loss or CTL

Constructive total Loss (CTL): This is a loss in which the damaged item can be repaired

but the cost of repairs exceeds replacement value of property immediately before the

date of loss. For example, if the value of the damaged item is Rs. 1,00,000 and its repair

cost is Rs. 1,05,000, the insurer treats it as total loss though the item is repairable. Such

loss is called Constructive Total Loss or CTL.

Partial loss: If the damaged item can be repaired, the cost of repairs is paid.

Total loss: In case of total loss, the insurer pays the actual replacement value of the item

immediately before the date of loss.



REINSTATEMENT OF SUM INSURED (IN CASE OF A LOSS):

After the settlement of the claim, the total sum insured is reduced by amount of claim amount

paid.

In order to ensure that there is no underinsurance for future claims, insured can reinstate sum

insured to original value by paying additional premium. This additional premium is to be paid on

the claim amount paid for the period from the date of the loss till the expiry of the policy.

Case Study on Calculation of Reinstatement Premium:

The following details are given:

S.I. under CAR policy = Rs. 2,00,00,000

Policy period = 02.01.14 to 01.01.16 (24 months or 730 days)

Premium rate = 1.00 %o

Premium charged = Rs. 20,000 (1.00 %o of 2,00,00,000)

Date of loss = 01.01.15

Final claim amount paid = Rs. 73,00,000

Because of this claim, as per the policy, the S.I. stands reduced by for Rs. 73,00,000.

The reinstatement premium is charge to bring back S.I. to the original value of Rs. 2,00,00,000

for the rest of the period.

Calculate the reinstatement premium.

Solution:

Premium on claim amount = Rs. 7300 (@ 1.00 %o on Rs. 73,00,000)

This is the premium for 24 months (730 days).

Pro-rata premium for remaining 365 days = (7300/730) X 365

(02.01.15 to 01.01.16) = Rs. 3650

Reinstatement premium of Rs. Rs. 3650 is to be paid by the insured for reinstatement of the S.I. to

original value of Rs. 2,00,00,000.



ERECTION ALL RISKS POLICY (EAR)

EAR policy is designed to protect interests of contractors & principals engaged in

erection/installation of plant & machinery projects.

It was earlier known as SCE (Storage cum Erection) insurance.

EAR policy is quite similar to CAR policy with some differences.

Property covered: Complete project during erection of plant & machinery including incidental civil

work, like, machinery foundation works.

In case the project work combines civil works and erection of machinery, the EAR policy is issued if

the cost of machinery erection work is more than 50% than that of civil works.

EAR policy provides Comprehensive cover for the entire plant & machinery erection From time of

arrival of first materials at site Till the work is over.

It may also cover risk during Testing Period (after erection is over) - One month erection period is

automatically covered. The cover for Testing Period beyond One month is at option of insured for

which additional premium is charged.

It may also cover maintenance period at option of insured for which additional premium is charged.

The policy provides ‘All Risk’ cover for sudden & unforeseen losses. But ‘All Risk’ cover does not

mean covering all the perils. Rather it means loss/damage from covering all the perils EXCEPT those

specifically excluded in the policy.

The property covered includes property related to the complete project at the project site during

storage & construction including materials & supplies.

The entities that can be insured covered includes:

Principals (owners)

Contractors

Sub-contractors

The EAR policy can also be issued in joint names of Principal & Contractors.



EAR COVERAGE:

The policy provides coverage under two sections:




This section coves loss/damage to the property of project. It is a comprehensive

cover on ‘All Risk’ basis. It covers sudden & unforeseen loss/damage to the insured

property from any cause EXCEPT the. specified exclusions

The examples of covered perils under Section I – Material damage include:

Fire & allied perils

Theft, burglary

Collapse, collision, Impact

Flood, storm & allied perils

Accidental loss/damage during construction due to:

Falling, dropping

Lack of skill

Negligence

Human error

Malicious act

(Note: EAR policy does not cover Defective workmanship, Defective material

and faulty design CAR policy covers Defective workmanship and Defective

material but not faulty design)


Section II covers insured’s legal liability to third parties for their injury /property damage

caused by activities related to the insured project.

To Remember:

Peril EAR policy CAR policy

Defective workmanship Not Covered Covered

Defective material Not Covered Covered

faulty design Not Covered Not Covered



EXCLUSIONS UNDER CAR POLICY

The cover is subject to a few exclusions as specified in the policy. These fall under the

following three categories:

General exclusions (for both section I & II)

Exclusions applicable to section I only

Exclusions applicable to section II only

General exclusions (for both section I & II): These include:

War, civil commotion

Nuclear reaction, radiation, radioactive contamination

Wilful act of insured or his representative

Wilful negligence of insured or his representative

Cessation of work (totally or partially)

Exclusions to section I only (Material damage)

Excess

Loss discovered during inventory only

Wear & tear; Gradual deterioration due to atmospheric conditions, Rust

o Scratching of painted/polished surface

Breakage of glass

Loss due to faulty design (Note: Loss due to defective workmanship or material is

covered)

Loss due to Defective material

Loss due to Defective workmanship

Cost of correction of error unless resulting in physical damage

Files, drawings, currency, cheques, stamps, deeds, etc.

Loss to packing material (Crates, boxes, etc.)

Loss to Vehicles licensed for general road use

Loss to Waterborne Vessels or machinery thereon

Loss to Aircraft

Consequential losses

Penalties

Exclusions to section II only (TPL)

Excess

Injury/illness of employees or workmen of insured or family members

Property of insured/his employees (own property)

Accident caused by vehicles licensed for general road use or by Waterborne Vessels

or Aircraft



PERIOD OF CAR INSURANCE:

Remember:

• Unloading

• Trial/test run

• 4 weeks

FROM: time after first unloading of property specified in policy from any conveyance at the site

TILL: First test operation or test loading, But not beyond 4 weeks of trial run after completion of

erection, whichever is earlier.

(Note: Premium is calculated for the period from the time of arrival of first consignment of materials at

the site even if insurance is requested at a later stage).

The cover beyond 4 weeks of trial run after completion of erection is available on payment of additional

premium.

DISMANTLING COVER: Insured can also take cover for DISMANTLING (of second hand machinery).

The premium for dismantling is generally @ 60% of EAR rate irrespective of period of dismantling.

TESTING AFTER INSTALLATION/ERECTION:

There are two categories of testing:

Cold testing (or functional testing):

Hot testing (operational & commissioning testing)

Cold testing (or functional testing): It includes checking parts by mechanical or hydrostatic

testing under ‘No Load’ conditions. The Testing is done without use of operation of furnaces,

heat, feed-stock, processing materials. It is treated as part of normal erection period as there is

not a big risk for the insurers.

Hot testing (Operational testing & Commissioning testing): It includes checking parts under

‘Load’ conditions. During testing, the plant is exposed to full load condition for the first time.

Operational testing: It is testing with use of operation of furnaces, heat, feed-stock,

processing materials.

Commissioning testing: It includes operation of property under production conditions

for purpose of attaining specification requirements on quality & quantity.

Hot testing is treated as a period of considerably increase risk and therefore attracts higher rate

and excess.



SUM INSURED

Insured has to declare sum insured separately for:

Material damage section and

TPL section (if opted)

The sum insured must represent the estimated complete erected value of project.

For section I, the completed erected value includes items like:

Landed cost of imported materials at site

Landed cost of indigenous materials at site

Cost of erection

Permanent civil engineering works, etc.

The cost of imported materials includes:

Custom duty paid on clearance

Clearing & forwarding charges to the agents

The cost of erection:

Includes cost of visits of specialists/supervision charges

Does not include pre-operative charges

The values for the sum insured should represent the current new replacement costs of the

items.

CASE STUDY ON SUM INSURED:

In a new chemical factory, the plant and machinery is to be erected the erection is to be covered

under Erection All Risk (EAR) policy. The details of the components of the project cost are as

under:

Value (in Rs. Crores)

Landed cost of imported materials : 160.00

Landed cost of indigenous materials : 40.00

Custom duty (for imported materials) : 30.00

Cost of erection : 80.00

Permanent civil engineering works : 40.00

TPL cover : 10.00

What will be the sum insured for Material Damage (Section I)?

Solution: Sum insured for Material Damage (Section I) = Rs. 350 Crores



MAINTENANCE PERIOD COVER:

The contractor can also take cover for the Maintenance Period (after completion of

construction work) to fulfil the obligations as per the contract of maintenance.

This period is also called ‘Defects Liability period’.

Generally the Maintenance Period is for 12 months. But it may vary for different types of

contracts.

There are two types of Maintenance cover as follows:

Maintenance visits cover (or Limited Maintenance cover)

Extended Maintenance cover

• It is similar to cover under CAR policy (Please refer to page no. 4-5 above)

Revision of sum insured:

In case of any change in certain costs during the policy period leading to change in

estimated project value, the S.I. can be increased or decreased.

The premium calculation for the revised is for the entire policy period since

inception date (and not pro-rata from date of revision to expiry date).

CASE STUDY ON REVISION OF SUM INSURED: Same as for CAR (Page 7)

AVERAGE CLAUSE (IN CASE OF UNDERINSURANCE): Same as for CAR (Page 8)

ADJUSTMENT OF SUM INSURED OF MATERIAL DAMAGE (SECTION I): Same as for CAR (Page 9)

SUPPLEMENTARY COVERS

Several following supplementary covers can be taken by insured under CAR policy on payment

of the additional premium:

TPL cover (under Section II)

Maintenance cover

Storage risk at fabricator’s premises/workshop

Intermediate storage

Construction Plant & Machinery (CPM) Cover

Removal of Debris



Overtime, express freight, etc.

Air freight

Additional custom duty

Temporary works/structures

Escalation

The above supplementary covers are taken as extensions under the CAR policy through

endorsements. For each supplementary cover, a separate ‘limit of insurance’ is to be selected by

the insured. The limits are expressed as amounts in rupees and or as a percentage.

For example, TPL cover (Under Section II) for Rs. 20,00,000

Removal of Debris cover for Rs. 5,00,000

Escalation for 5% of S.I. (Section I)

`

TPL COVER: (Same as for CAR)

Sum insured for TPL Section: A separate sum insured is to be selected by insured for this

section. This sum insured represents the insurer’s limit of TP liability. This cover is granted for

the third party liability arising out of the project work. It covers insured’s liability from accidental

injury to third party person &/or damage to third party’s property.

The TPL coverage is subject to the following limits specified in the policy:

Any one accident (AOA) limit (all liabilities from single accident)

Any one period (AOP) limit (cumulative amount from all liabilities from all

accidents occurring during policy period)

Generally, there is a cap on maximum TPL limit for which cover can be taken under CAR policy.

In case insured wants cover for more than that amount, it can be taken under a separate TPL

policy under miscellaneous department.

For TPL cover, the rate applicable is 100% of the basic CAR rate (i.e. same rate).

There is no average clause applicable in case of TPL cover.

CONSTRUCTION PLANT & MACHINERY (CPM) COVER: (Same as for CAR)

This cover is granted for the construction plant & machinery to be used at the project site.

The construction plant & machinery is covered on new replacement value basis.

It excludes damage directly by its own mechanical or electrical breakdown or derangement.

Like for TPL cover, there is a maximum limit up to which this cover can be taken under CAR

policy. For the amount beyond the prescribed limit, the insured needs to take a separate CPM

policy as per rate & excess of the CPM policy.

SURROUNDING PROPERTY COVER: (Same as for CAR)

During erection/construction of the insured items, there is a possibility of damage to the

insured’s other property not related to the insured project work.



It covers damage to insured’s other property lying at or adjacent to project site and belonging to

or held in care, custody or control of the principal or the contractor. A separate sum insured to

be mentioned for covering this property.

For surrounding property, the rate applicable is 50% of the basic CAR rate.

CLEARANCE & REMOVAL OF DEBRIS (Same as for CAR)

It covers cost of removal of debris of insured property damaged due to insured perils. This cost

is payable if claim for property damage is otherwise payable. It is to be covered against separate

sum insured.

For this cover, the rate applicable is 100% of the basic CAR rate (i.e. same rate).

ESCALATION (Same as for CAR)

It increase the sum insured by the percentage of escalation chosen. For ascertaining

underinsurance after a loss, the actual value of the complete project is compared with the sum

insured with escalation amount.

The premium for escalation is calculated by applying the basic CAR rate on 50% of escalation

amount.

CASE STUDIES ON PREMIUM CALCULATION: (Same as for CAR – Page 11)

EARTHQUAKE COVER: (Same as for CAR – Page 11)

EXCESS:

In EAR policy, there is separate excess for the following:

Storage and erection claims (called normal excess)

Testing period (called testing period excess)

Maintenance period claims (as testing period excess)

‘Act of God’ Claims

‘Fire/explosion’ Claims

AOG (Act of God perils) perils include Earthquake (Fire & Shock), Landslide, Rock-slide,

Subsidence, Storm, Flood, Inundation,

Example: Excess for

Storage and erection claims - 5% of claim amount subject to minimum

Rs. 10,000

Testing period claims - 5% of claim amount subject to minimum Rs. 30,000

‘AOG’ Claims - 10% of claim amount subject to minimum Testing period with

upper limit of Rs 5 crore)



For AOG (Act of God perils) claims, Remember 7 consecutive days. For purpose of excess, an

AOG incident(e.g. flood) is not terminated until there have been 7 consecutive days from the

peril concerned.

EXAMPLE:

First incident of flood in an area on: 16th August 2015

Till 7 consecutive days from 16th August, all flood incidents will be considered as single event.

All flood incidents from 16th August to 23rd August 2015 will be a single flood event. Hence

single excess will be applicable.

Two types of Excess:

Minimum compulsory excess

Voluntary (Higher) excess (Same as for CAR)

PREMIUM RATE CALCULATION

The EAR rates depend on the following:

Type of project work

Period of project insurance

Location of project site (for earthquake cover, there are different rates for areas falling

under different earthquake zones)

CAR premium rates are indicated as follows:

Rates for Flour mills plant Rate per mille (%o)

1. Rate for 1st month + I month testing (i.e. first two months):

2.00

2. Rate for next 10 months (per month rate): .05

3. Rate for further period (per month rate):

.025

4. Rate for Testing period extension i.e. if testing for more than one month (per month rate):

0.30

Case Study 1 on Rate Calculation:

From the above flour mill rating structure, calculate the basic EAR rate if the Policy Period is for 16

months including 1 month testing period.

Solution:

Rate for 1+1 month : 2.00 %o

Rate for next 10 months : 0.50 %o (.05 X 10 months)


Total Basic EAR Rate : 2.60 %o (2.00 + 0.50 + 0.10)



Case Study 2 on Rate Calculation:

From the above flour mill rating structure, calculate the basic EAR rate if the Policy Period is for 16

months including 2 months testing period.

Solution:

Rate for 1+1 month : 2.00 %o



Rate for 1 month testing : 0.30 %o (.30 X 1 months)

Total Basic EAR Rate : 2.875 %o (2.00 + 0.50 + 0.075 + 0.30)

000000000000000000000000000000000000000000000

HIGH VALUE PROJECTS

The CAR policy wordings are standardized. But high value projects like, projects with value being more

than Rs. 2500 crores, these are exempted from using standard wordings. The insurers may make

reference to the reinsurers for special rates, terms, conditions, etc.

POLICY CONDITIONS

Some of the policy conditions are as follows:

Notification of any material change in the risk to be immediately given to the insured

and and payment of additional premium to be made if required by the insurer.

Notice of claim to be given within 14 days of the loss.

Insurer’s rights of recovery (under subrogation) must be preserved by the insured.

Contribution will be applicable, if the loss is covered under more than one policy by

different insurers.

The differences regarding amount/quantum of claim are to be submitted to arbitration

(provide the claim is otherwise payable).

If the claim is found to be fraudulent, all benefits under the policy are forfeited.

Basis of Indemnification:

The loss may be of the following types:

Partial loss (repair of damaged item can be done)

Total loss

Total Loss may be of following types:

Repair cannot be done

Item stolen/misplaced

Constructive total loss or CTL



Constructive total Loss (CTL): This is a loss in which the damaged item can be repaired

but the cost of repairs exceeds replacement value of property immediately before the

date of loss. For example, if the value of the damaged item is Rs. 2,00,000 and its repair

cost is Rs. 2,11,000, the insurer treats it as total loss though the item is repairable. Such

loss is called Constructive Total Loss or CTL.

Partial loss: If the damaged item can be repaired, the cost of repairs is paid.

Total loss: In case of total loss, the insurer pays the actual replacement value of the item

immediately before the date of loss.

REINSTATEMENT OF SUM INSURED (IN CASE OF A LOSS):

After the settlement of the claim, the total sum insured is reduced by amount of claim amount

paid.

In order to ensure that there is no underinsurance for future claims, insured can reinstate sum

insured to original value by paying additional premium. This additional premium is to be paid on

the claim amount paid for the period from the date of the loss till the expiry of the policy.

Case Study on Calculation of Reinstatement Premium:

The following details are given:

S.I. under EAR policy = Rs. 4,00,00,000

Policy period = 02.01.14 to 01.01.16 (24 months or 730 days)

Premium rate = 2.00 %o

Premium charged = Rs. 80,000 (2.00 %o of 4,00,00,000)

Date of loss = 01.09.15

Final claim amount paid = Rs. 73,00,000

Because of this claim, as per the policy, the S.I. stands reduced by for Rs. 73,00,000.

The reinstatement premium is charge to bring back S.I. to the original value of Rs. 4,00,00,000

for the rest of the period.

Calculate the reinstatement premium.

Solution:

Premium on claim amount = Rs. 14600 (@ 2.00 %o on Rs. 73,00,000)

This is the premium for 24 months (730 days).

Pro-rata premium for remaining 90 days = (14600/730) X 90

(02.09.15 to 01.01.16) = Rs. 1800

Reinstatement premium of Rs. Rs. 1800 is to be paid by the insured for reinstatement of the S.I. to

original value of Rs. 4,00,00,000.

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