CAR Insurance Exclusions Malaysia: What Contractor's All Risks Doesn't Cover

Disclaimer: This article provides general guidance based on standard Contractor's All Risks policy wordings used by Malaysian insurers as of January 2026. Policy terms vary between insurers and individual contracts. Always review your specific policy wording and consult with your insurance broker before making coverage decisions.

Your CAR policy rejected a RM500,000 claim because of three words buried in page 4 of your policy document. It happens more often than you'd expect.

Contractor's All Risks insurance covers many things, but "all risks" is misleading. Every CAR policy contains exclusions that can void your claim entirely.

This guide covers:

• General exclusions that apply to your entire CAR policy
• Material damage exclusions affecting Section I claims
• Third party liability exclusions under Section II
• How to identify and address coverage gaps
• Extensions that can buy back excluded perils

How CAR Policy Exclusions Work in Malaysia

CAR insurance operates on a "negative definition" basis. Instead of listing what's covered, the policy covers all sudden and unforeseen physical loss or damage except what's specifically excluded. This makes understanding exclusions critical to knowing your actual protection.

Malaysian CAR policies regulated under the Financial Services Act 2013 typically contain three categories of exclusions. General exclusions apply across the entire policy. Section I exclusions affect material damage claims. Section II exclusions limit third party liability coverage.

The policy wording matters. Phrases like "directly or indirectly caused by" or "arising out of" significantly broaden exclusion scope. A fire caused by riot, for example, triggers the civil commotion exclusion even though fire itself would normally be covered.

General Exclusions: What Voids Your Entire CAR Policy

General exclusions apply regardless of whether you're claiming material damage or third party liability. These are the broadest exclusions and most are non-negotiable.

War and Political Violence

Standard CAR policies exclude loss, damage or liability directly or indirectly caused by war, invasion, act of foreign enemy, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, or mutiny. This extends to confiscation, commandeering, or destruction by order of any government.

The phrase "whether war be declared or not" is deliberate. Undeclared military actions, border conflicts, and peacekeeping operations that turn violent all trigger this exclusion.

Riot, Strike and Civil Commotion (SRCC)

Damage from riot, strike, lock-out, civil commotion, or military or usurped power is excluded by default. This also covers groups of malicious persons acting on behalf of any political organisation.

SRCC coverage can typically be endorsed back into your policy for additional premium. Given Malaysia's stable environment, this extension is relatively affordable but still requires explicit inclusion.

Nuclear Risks

Nuclear reaction, nuclear radiation, or radioactive contamination are universally excluded. This applies even if the nuclear event occurs overseas and affects your Malaysian project indirectly through supply chain disruption or material contamination.

Terrorism

The terrorism exclusion endorsement specifically excludes loss, damage, cost or expense directly or indirectly caused by, resulting from, or in connection with any act of terrorism. This includes actions taken to control, prevent, suppress, or remediate terrorism.

Malaysian insurers define terrorism as any act involving force, violence, or threat thereof committed for political, religious, ideological or similar purposes, including intention to influence any government or put the public in fear.

Important: The burden of proving that loss is NOT terrorism-related falls on you, the insured. If the insurer alleges terrorism applies, you must prove otherwise.

Wilful Acts and Negligence

Wilful act or wilful negligence of the insured or their representatives voids coverage entirely. This differs from ordinary negligence, which is typically covered. The distinction matters during claims investigation.

Ordinary negligence means failure to exercise reasonable care. Wilful negligence means knowing something is dangerous but proceeding anyway, or intentionally ignoring safety requirements.

Cessation of Work

If your project stops, whether totally or partially, your CAR coverage can cease. Extended work stoppages increase risk exposure and require notification to insurers. Continued coverage during cessation typically requires endorsement and may involve additional premium.

Cyber and Data Losses

Modern CAR policies include explicit cyber exclusions under clauses like LMA 5401 (Property Cyber and Data Exclusion). These exclude any cyber loss, including unauthorised access, malicious acts, system failures, or data corruption affecting computer systems.

This matters for construction projects using BIM systems, automated equipment, or digital monitoring. If a cyber attack disrupts your crane control system causing a collapse, the cyber exclusion may apply even though the physical damage is real.

Section I Exclusions: Material Damage Limitations

Section I exclusions specifically limit coverage for physical damage to the works, materials, and construction plant.

Defective Design, Materials, and Workmanship (DE3 Clause)

This is the most significant Section I exclusion and the most commonly misunderstood. Standard CAR policies exclude the cost of making good defective material, workmanship, or design. The exclusion doesn't end there.

The exclusion extends to loss or damage directly caused by such defects. Some policies limit this to consequences that could have been avoided by reasonable testing. Others exclude all consequential damage arising from the defect.

The London Engineering Group (LEG) clauses provide standardised approaches to defects exclusions:

Most Malaysian CAR policies operate on LEG 2 equivalent wording. This means if defective welding causes a beam to collapse and damages completed floors below, the policy covers the floor damage but not the cost of rewelding the beam.

Mechanical and Electrical Breakdown

Construction plant and equipment breakdown from mechanical or electrical causes is excluded. This includes wear and tear, fatigue, internal explosion of plant machinery, and breakdown due to own defect.

The exclusion protects insurers from maintenance failures being claimed as construction losses. Separate Machinery Breakdown insurance addresses this gap.

Inventory Shortage

Loss or damage discovered only at inventory taking is excluded. You cannot claim for materials you noticed were missing during stocktake without evidence of a specific loss event.

This exclusion prevents unverifiable theft claims. Document theft or damage at the time of discovery, not weeks later during inventory review.

Wear, Tear and Gradual Deterioration

Normal wear and tear, gradual deterioration, rust, oxidation, mould, and similar progressive damage is excluded. CAR covers sudden and unforeseen events, not expected degradation.

Materials stored on site for extended periods require proper protection. Corrosion from exposure doesn't become a claimable event just because the project duration extended unexpectedly.

Errors in Design

Some policies contain separate exclusions for errors in design beyond the DE3 workmanship clause. These may exclude all costs arising from design errors, including project delays and redesign expenses.

The distinction between design defect and workmanship defect matters. Installing correctly-designed beams incorrectly is workmanship. Installing incorrectly-designed beams correctly is design. Both are excluded, but the extent of consequential damage coverage differs.

Section II Exclusions: Third Party Liability Limitations

Section II provides coverage for third party claims arising from construction activities. These exclusions limit that protection.

Vehicles on Public Roads

Liability arising from motor vehicles required to be insured under the Road Transport Act 1987 is excluded. Your construction trucks, delivery vehicles, and mobile plant using public roads need separate Motor insurance.

The exclusion applies to any vehicle requiring road tax and insurance certificate. Mobile cranes, excavators on transporters, and concrete trucks all require separate Motor coverage when operating on public roads.

Watercraft and Aircraft

Liability arising from watercraft or aircraft is excluded. Marine construction projects require separate Marine liability coverage. Drone surveys need Aviation liability insurance.

Employees and Workers

Liability to employees of the insured is excluded. Workmen's Compensation insurance is mandatory under Malaysian law for workplace injuries and provides this coverage.

The exclusion covers not just direct employees but workers under your supervision and control. Subcontractor workers may fall under this exclusion depending on the degree of control you exercise.

Contractual Liability

Liability assumed solely by contract is excluded. If your construction contract makes you liable for something you wouldn't ordinarily be legally responsible for, that contractual assumption isn't covered.

Indemnity clauses requiring you to hold the principal harmless may create uncovered contractual liabilities. Review contract indemnity requirements against policy coverage before signing.

Vibration, Removal of Support, and Weakening

Liability for damage caused by vibration, removal or weakening of support, or interference with the public or private right of access or light is typically excluded. This affects piling, tunnelling, demolition, and excavation projects significantly.

Neighbouring buildings damaged by vibration from pile driving won't be covered under standard policy terms. This exclusion can be endorsed back, usually requiring pre-construction surveys, monitoring protocols, and specific underwriting approval.

Fines, Penalties, and Punitive Damages

Fines, penalties, and exemplary or punitive damages are excluded. These represent punishment rather than compensation and are uninsurable as a matter of public policy.

DOSH fines under OSHA 1994, environmental penalties, and court-imposed punitive damages cannot be transferred to insurers regardless of policy terms.

Property in Care, Custody, or Control

Third party property in your care, custody, or control may be excluded from Section II liability coverage. This matters when you're working on or adjacent to existing structures belonging to your client or third parties.

An existing building being renovated is in your care. Damage to it during construction may not trigger Section II coverage because it's not truly "third party" when you control it. This creates a gap between Section I (which covers your works) and Section II (which covers third parties).

Common Claim Rejection Scenarios

Understanding why claims fail helps you avoid common pitfalls. These scenarios represent frequent rejection patterns in Malaysian CAR claims.

Extensions That Buy Back Coverage

Many standard exclusions can be endorsed back into coverage for additional premium. Understanding available extensions helps you close critical gaps.

How to Review Your CAR Policy for Exclusion Gaps

A systematic review of your policy against your project's actual risk profile identifies gaps before they become problems.

Step 1: Map Your Project Risks

List all activities, methodologies, and exposures specific to your project. Consider ground conditions, proximity to existing structures, equipment types, subcontractor activities, and contractual obligations.

Step 2: Cross-Reference Against Exclusions

For each identified risk, check whether standard exclusions apply. Pay particular attention to consequential loss exposure, defects scenarios, vibration/support removal, and third party property in your control.

Step 3: Assess Extension Needs

Determine which extensions are essential versus optional. Consider both probability and financial impact. A low-probability event with catastrophic financial consequences may justify extension premium.

Step 4: Review Sum Insured Adequacy

Underinsurance triggers proportional claims reduction. Ensure your sum insured reflects completed contract value including all materials, labour, fees, duties, and inflation allowance.

Step 5: Verify Contract Alignment

Your construction contract may require specific coverage. Compare contract insurance requirements against your actual policy terms. Gaps create contractual breach exposure even if insurance exclusions are standard.

FAQ

Does CAR insurance cover project delays?

No. Consequential losses including penalties, delays, and loss of contract are explicitly excluded from standard CAR policies. Delay in Start-Up (DSU) or Advanced Loss of Profits (ALOP) extensions provide this coverage for additional premium.

What happens if I don't disclose material information to my insurer?

Under the Financial Services Act 2013, non-disclosure or misrepresentation can result in policy avoidance, claim refusal or reduction, change of terms, or policy termination. For business insurance, you have a duty to disclose everything a reasonable person would consider relevant to the insurer's decision.

Are subcontractor defects covered under my CAR policy?

The cost to rectify defective work itself is excluded, regardless of whether your own workers or subcontractors performed it. Resulting damage to correctly-executed work may be covered, depending on your policy's defects exclusion wording. LEG 3 endorsement provides broadest coverage.

Does CAR cover my construction equipment breakdown?

No. Mechanical and electrical breakdown of construction plant and equipment is excluded from Section I material damage cover. Separate Machinery Breakdown insurance addresses this risk. However, resulting damage to other insured property from the breakdown may be covered.

What if adjacent buildings are damaged by my piling works?

Damage caused by vibration or removal/weakening of support is typically excluded from Section II third party liability. This exclusion can be endorsed back into coverage, usually with specific conditions around monitoring, methodology, and pre-construction surveys.

Are my workers' injuries covered under CAR insurance?

No. Employee injuries are excluded from CAR Section II liability cover. Workmen's Compensation insurance is mandatory under Malaysian law for workplace injuries. CAR third party liability covers injuries to third parties, not your workforce.

Does the terrorism exclusion apply to all terrorist incidents?

Yes. The terrorism exclusion covers any act involving force, violence, or threat thereof committed for political, religious, or ideological purposes. The burden of proving that loss is NOT terrorism-related falls on you as the insured. Terrorism coverage can be purchased separately.

What is the difference between LEG 1, LEG 2 and LEG 3?

LEG 1 excludes both defective items and resulting damage. LEG 2 excludes defective items but covers resulting damage to non-defective work. LEG 3 covers both, excluding only costs that improve upon the original design or materials. Most Malaysian policies operate on LEG 2 equivalent wording.

Can I claim for materials stolen from site?

Theft is generally a covered peril under CAR Section I, provided you can demonstrate when and how the loss occurred. Loss discovered only at inventory, without evidence of a specific theft event, is excluded. Good site security records and incident documentation strengthen theft claims.

What happens if my CAR sum insured is too low?

Underinsurance triggers proportional settlement. If your sum insured is 80% of what it should be, your claim settlement will be reduced to 80% of the assessed loss. This applies to each item separately, so partial underinsurance on one item doesn't affect claims on adequately insured items.

Foundation Conclusion

CAR insurance exclusions define the boundaries of your construction project protection. Understanding what's not covered is as important as knowing what is.

Every construction project carries unique risks that interact differently with standard policy exclusions. A policy that works for one project may leave critical gaps on another. The cost of discovering these gaps through a rejected claim far exceeds the effort of reviewing them beforehand.

Talk to our construction insurance specialists about your project's specific risks and coverage needs