Main Characteristics
- Coverage for damage to works in progress and equipment
- Protection against project delays and additional costs
- Civil liability coverage for damage to third parties
- May be extended to cover high-tech installations
Contractors’ All Risks (CAR) and Erection All Risks (EAR) policies are essential insurance tools, especially in the case of projects funded with project financing. These tools offer comprehensive coverage against the risks associated with the execution of complex works, protecting both investors and financiers against potential losses resulting from material damage during construction or installation.
The importance of CAR/EAR policies for project financing
In the context of project financing, where projects are often financed with credit and future cash flow from the completed project will be crucial in reimbursing the loan, protection against construction risks is essential. CAR/EAR policies cover a huge spectrum of risks, among which damage caused by natural events, human error, theft and other incidents which could jeopardize the successful completion of the project. This coverage ensures that unforeseen eventualities will not threaten the financial sustainability of the project and its future capacity to generate the expected cash flows.
Extension to include ALOP (Advance Loss of Profit) coverage
An important extension of CAR/EAR policies is coverage for Advance Loss of Profit (ALOP), also known as Delay in Start-Up (DSU). This coverage protects the contracting party against financial losses resulting from delays in the commencement of works caused by material damage covered by the main policy. In practice, if a covered event causes delays in the completion of the works, the ALOP extension compensates the policyholder for the resulting loss in earnings, including:
- Loss of gross profit: coverage of lost turnover caused by the delay.
- General ongoing expenses: coverage of operational costs which the business continues to sustain in spite of the delay.
- Additional costs to mitigate losses: further expenses incurred to accelerate work and minimise the delay.
This extension is particularly important for large projects, where even short delays can translate to substantial financial losses. For example, in the energy sector, every day that the entry into operation of a power plant is delayed will result in considerable lost revenue.
Key Considerations
- Accurate risk assessment: Conducting a detailed analysis of the potential risks associated with the project is essential in order to determine the appropriate coverage and the corresponding sums insured.
- Clear definition of the indemnity period: Clearly establishing the maximum period of time for which the insurance will cover the losses arising from a delay.
- Specific clauses in insurance contract: Including clauses in the contract which clearly define the terms and conditions of coverage, exclusions, and the procedures to be observed in the event of an incident.
The inclusion of the ALOP extension in CAR/EAR policies represents a strategically essential tool for managing the risks involved in projects funded with project financing. This combination offers comprehensive protection against both material damage occurring during construction and financial losses caused by delays, ensuring the economic stability and success of the project.
