Construction is one of the riskiest areas of business: a fire on site, a structural collapse, a flooded excavation, a hurricane or an installer's mistake can wipe out months of work. Construction and erection all risks insurance (SMR insurance in Russian) protects the contractor, the client and the lending bank against such losses. Here is how the contract works and what to look out for.

Why it matters for contractors and clients

Under Article 741 of the Civil Code of the Russian Federation, the risk of accidental loss of or damage to the construction project before it is accepted by the client lies with the contractor, unless the contract provides otherwise. Article 742 of the Civil Code allows a construction contract to oblige the party bearing the risk to insure the works, materials, equipment and liability for harm to third parties.

So construction all risks insurance is voluntary in itself, but in practice it is often required by:

  • clients — in the terms of the construction contract or tender documentation;
  • banks — in project finance and construction lending;
  • investors and general contractors — from their subcontractors.

Who takes out the policy and who receives the payout

The policyholder is usually the general contractor or the client. All participants in the project — subcontractors, installation contractors — can be included in the contract, and the lending bank can be named as beneficiary. This way a single policy covers the risks of the entire project, and there are no disputes over whose policy should pay.

What the contract covers

Section 1. Material damage

The policy covers loss of or damage to:

  • the construction or erection works at all stages;
  • building materials and equipment to be installed on site;
  • temporary buildings and structures;
  • construction machinery — if included in the contract.

Typical risks are fire, explosion, lightning, natural disasters, collapse, flooding, unlawful acts by third parties, and errors and negligence of personnel. The cost of clearing debris after a loss can be insured separately.

Section 2. Third-party liability

This compensates harm to the life, health and property of third parties caused during the works: cracks in neighbouring buildings due to vibration, damage to utilities, injuries to passers-by. This section is particularly important for work in dense urban areas.

Additional covers

  • Maintenance period. Losses discovered after handover if they were caused by work carried out during construction.
  • Testing and commissioning. For equipment installation — risks during integrated testing.
  • Delay in start-up. The client's financial losses if commissioning is delayed because of insured physical damage.

Typical exclusions

  • wear and tear, corrosion and gradual deterioration;
  • the cost of replacing the defective material or wrongly designed element itself — although damage it causes to other parts of the works may be covered under the contract terms;
  • fines, penalties and losses from missed deadlines, unless separately included;
  • intentional acts of the policyholder;
  • losses during a suspension of works that the insurer was not notified of.

Sum insured and period

The sum insured under the material damage section is usually equal to the full estimated value of the works, including materials and equipment. Understating it does not pay: in the event of underinsurance, the payout may be reduced proportionally under Article 949 of the Civil Code. If the project value changes, the contract should be adjusted.

The period of insurance runs from the start of works until the acceptance certificate is signed and, if necessary, includes a maintenance period. If construction is suspended, the insurer must be informed: terms for the downtime are agreed separately.

What drives the cost

  • the type and complexity of the project, and the construction technology;
  • the site location: geology, seismic activity, flood risk, density of surrounding buildings;
  • the duration of the works and the maintenance period;
  • the contractor's experience and claims history;
  • the sections chosen, liability limits and deductible.

Insurers usually cede large and technically complex projects to reinsurance, so detailed information is needed for a quote: the construction contract, cost estimate, schedule, design documentation, a description of the site and details of the contractors.

What to check before signing

  • compare the list of insured events and exclusions with the actual nature of the works;
  • check that all participants in the project are insured parties;
  • make sure the maintenance period and downtime are covered;
  • agree separate deductibles for natural perils and other losses.

Read more about the product in the construction and erection all risks insurance section. You can add general liability and commercial property insurance to round out your protection. Polis Re specialists will help you gather the information and request offers from insurers — submit a request.