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

A subcontractor on a Klang Valley high-rise drops a steel beam through three floors. The principal contractor's CAR pays out. The same subcontractor's site supervisor designs a temporary works detail wrong, the formwork collapses two weeks later, and a worker is hospitalised. This time, the CAR refuses the claim. Same project, same insurer, same policy, different exclusion clauses doing the work.

CAR insurance in Malaysia covers a defined scope of physical loss and third-party liability, but it carries a list of standard exclusions that catch contractors who didn't read past the cover note.

This guide walks through the 12 most commonly missed exclusions in Malaysian CAR policies: what each exclusion means in plain language, a typical example of how the gap shows up, and how contractors usually address it (other policy, contract clause, or risk control). It also flags the exclusion patterns that vary between JKR / government tenders and PAM 2018 / IEM private contracts.

Why CAR exclusions matter more than the cover sections

CAR is sold on what it covers: physical loss to the works, third-party liability arising from the works. But the financial damage to a contractor almost always comes from what's not covered. A claim refused on an exclusion is the same outcome as having no insurance at all, except the contractor paid the premium expecting cover.

Two failure modes show up repeatedly. First: the contractor assumes "all risks" means "all risks" and doesn't read the exclusions schedule. Second: the contractor reads the exclusions but doesn't realise the principal contract requires cover for one of the excluded items, leaving them in breach of contract while uninsured.

The 12 exclusions below are the ones that surface in claims disputes most often in the Malaysian market.

The 12 standard CAR exclusions Malaysian contractors miss

1. Design defects and design negligence

What it means: damage that results from defective design, plans, or specifications is excluded. If the structure fails because the design was wrong, CAR doesn't pay.

Typical example: a retaining wall is under-designed for the soil load. It collapses during construction. The collapse damages adjacent works. CAR pays for the adjacent damage if and only if the design defect itself isn't the immediate cause of the loss being claimed.

How contractors address it: Professional Indemnity (SPPI) for the designer. The principal contractor doesn't carry design risk under CAR; the consultant or design-and-build contractor does. If you're delivering a design-and-build project, your PI cover, not your CAR, is what stands between you and the claim.

2. Faulty workmanship in the work itself

What it means: damage to the specific portion of work where the workmanship was faulty is excluded. The badly-poured slab itself isn't covered; damage that bad work causes to other parts of the works may or may not be, depending on the extension.

Typical example: a column is cast with insufficient cover to the rebar. Six months in, corrosion shows. The column has to be demolished and recast. CAR pays for the demolition and reinstatement only if a DE3, DE4, or DE5 extension was bought. Without the extension, this is the contractor's cost to fix.

How contractors address it: buy the appropriate Defects Exclusion (DE) extension at policy inception. DE3 covers consequential damage, DE4 also covers the cost of the part itself, DE5 is the broadest. Most Malaysian CAR policies default to DE3 or no extension; specify DE4 or DE5 explicitly if your contract or risk profile calls for it.

3. Wear, tear, and gradual deterioration

What it means: any loss caused by gradual processes, corrosion, erosion, decay, gradual movement, vegetation growth, is excluded. CAR is built to respond to sudden and unforeseen events, not slow degradation.

Typical example: temporary scaffolding rusts over a 24-month project and one section fails under load. The failure looks sudden, but the cause is gradual corrosion. The claim is contested, often refused.

How contractors address it: maintenance discipline and inspection records. There is no insurance fix. The exclusion is universal.

4. Consequential loss and delay in start-up

What it means: financial losses caused by delay are excluded under standard CAR. If a covered loss delays project completion and the principal claims liquidated damages or the contractor loses revenue from late handover, CAR pays for the physical damage but not for the consequential financial impact.

Typical example: a fire damages partially complete works. CAR pays to rebuild. But the project is delayed three months, the contractor is hit with LDs by the principal, and there's no cover for those LDs under CAR.

How contractors address it: Delay in Start-Up (DSU) cover, also called Advanced Loss of Profits (ALOP). DSU is a separate add-on that pays for the financial consequences of a covered physical loss. Required by some lender and PFI conditions; rare elsewhere.

5. War, terrorism, civil commotion, and political risks

What it means: damage from war (declared or undeclared), terrorism, riot, strike, civil commotion, and political acts is excluded by default. The exclusion is broad, Malaysian CAR policies follow the international standard wording.

Typical example: a project site is damaged during civil unrest. The damage looks like vandalism on the surface; the insurer applies the riot/civil commotion exclusion. Claim refused.

How contractors address it: standalone Terrorism cover or a buy-back endorsement if the principal contract requires it. For most Malaysian projects this is not bought; for projects in higher-risk locations (border areas, oil & gas regions during election cycles) it may be required.

6. Mechanical and electrical breakdown of the contractor's plant

What it means: breakdown of the contractor's own plant and machinery (cranes, generators, mixers) from internal failure is excluded under CAR Section I. CAR covers the works being built, not the contractor's tools.

Typical example: a tower crane motor burns out. The crane is out of action for 10 days. The cost of repair and the project delay are not CAR claims.

How contractors address it: separate Contractor's Plant and Machinery (CPM) insurance, sometimes also called Plant All Risks. This is an annual policy on the contractor's equipment fleet, not project-by-project.

7. Damage caused by faulty materials

What it means: damage caused by inherently defective materials is excluded. If the material itself was faulty when delivered, the resulting damage isn't covered, even if the contractor didn't know.

Typical example: a batch of cement is contaminated and concrete cured from it fails. The structure cracks. CAR refuses on faulty materials grounds. The contractor's recourse is against the supplier, not the insurer.

How contractors address it: contractually, through supplier warranties and quality testing protocols. Insurance can sometimes pick up consequential damage to other parts of the works if a faulty-materials extension is bought, but the faulty material itself is never insured.

8. Inventory shortages and unexplained losses

What it means: shortages discovered only at stocktake, where there's no specific incident, no break-in, no documented loss event, are excluded. CAR responds to identifiable losses, not to bookkeeping discrepancies.

Typical example: a contractor reports RM80k of cabling missing at site clearance. There's no break-in report, no incident log, no police report, just a stock count gap. The claim is refused.

How contractors address it: site security, stock control, and incident reporting discipline. There is no insurance fix for shortages without documented loss events.

9. Theft and pilferage of unsecured small items

What it means: theft cover under CAR usually excludes items not properly secured. Tools left in unlocked containers, materials stockpiled without fencing, and items removed from a documented secured location can be excluded depending on the policy schedule.

Typical example: small tools stolen from an open materials laydown area. The CAR policy requires "reasonable security" and the insurer disputes whether laydown protection met the standard. Claim contested.

How contractors address it: site security plans, lockable container storage for high-value items, and an incident response procedure that produces a police report immediately. Some CAR policies also limit theft cover to a per-item or per-incident sub-limit; check the schedule.

10. Damage from rectification work after handover

What it means: damage caused by the contractor while making good defects during the maintenance period (also called defects liability period) is covered only if the policy was extended into the maintenance period. The base policy ends at practical completion.

Typical example: contractor returns 4 months after handover to fix a leak in the cladding. While drilling, they damage the curtain wall behind. CAR is only liable if the maintenance period extension is in force.

How contractors address it: ensure the CAR maintenance period matches the contract's defects liability period (12 or 24 months in PAM 2018; varies in JKR conditions). Don't accept "maintenance period: same as policy" without checking dates.

11. Contractual penalties beyond the legal duty

What it means: liability assumed under contract that goes beyond what the contractor would have owed at common law is excluded. If the contract makes the contractor liable for things they wouldn't otherwise be liable for, the additional layer isn't insured.

Typical example: a JKR contract makes the contractor liable for any damage to existing infrastructure within 100m of the site, regardless of cause. The contractor causes damage at 80m via vibration. Common-law liability would attach for negligence; contractual liability attaches regardless. CAR responds to the negligence portion only.

How contractors address it: read the contract before signing. Push back on indemnity clauses that go beyond legal duty. Where they can't be removed, price the risk into the bid as uninsured.

12. Asbestos, pollution, and environmental impairment

What it means: liability for asbestos exposure, gradual pollution, and environmental impairment is excluded. CAR's third-party liability covers sudden and accidental events; gradual environmental harm isn't covered.

Typical example: dewatering on a site contaminates a neighbouring water body over 6 months. The neighbour sues. The pollution exclusion applies, claim refused.

How contractors address it: Environmental Impairment Liability (EIL) cover for projects with meaningful pollution exposure. This is a separate annual or project policy, not an extension to CAR.

Standard CAR extensions that buy back exclusions

Several of the exclusions above can be partially or fully bought back through standard market extensions. Whether they should be depends on the project profile and what the principal contract requires.

Extension	What it buys back	When to consider
DE3 / DE4 / DE5	Faulty workmanship buy-backs. DE3 covers consequential damage, DE4 also covers the part itself, DE5 is broadest.	Standard on most projects. Specify DE4 or DE5 if your contract carries higher workmanship risk or longer maintenance period.
Maintenance Visits / Extended Maintenance	Extends cover into the defects liability period for damage caused while making good defects.	Always, match the policy's maintenance period to the contract's defects liability period.
Strike, Riot & Civil Commotion (SRCC)	Buys back damage from civil commotion. Excludes war and terrorism.	Project-dependent. Required for some lender / government conditions; rarely relevant for standard private projects.
Terrorism	Standalone cover or buy-back; varies by market.	Required by some PFI/PPP contracts and some lender consortia. Rare on private projects.
Off-site Storage / Transit	Cover for materials in transit and at off-site storage before they're at the project site.	Critical for prefab, modular, and imported materials. Specify the storage locations and value.
Existing Surrounding Property	Cover for damage to property owned by the employer that's adjacent to or within the works.	Renovation, fit-out, and works inside operating facilities. Required by most PAM 2018 contracts for renovation.
Cross-Liability	Allows insured parties to claim against each other within the policy.	Always, needed for the named-insured arrangement to actually function.

JKR and government tender exclusion patterns

JKR and other Malaysian government tenders prescribe specific clauses around exclusions and extensions. The tender SST will usually state minimum cover requirements and may explicitly require certain extensions to be in force.

Common patterns in JKR / MOF tenders:

• Cross-liability waiver between named parties is mandatory.
• Existing surrounding property extension where works are within or adjacent to operational facilities.
• Maintenance period to match the contract's defects liability period (often 24 months for major civil works).
• Theft cover on stored materials with stated minimum security standards.
• SRCC may be required depending on project type and location.

Where the gap usually opens: the tender SST states a requirement, the contractor takes a CAR cover note that doesn't actually include it, and the discrepancy isn't picked up until first claim or end-of-project audit. The fix is to send the tender SST clauses to the intermediary at quote stage and verify each extension is endorsed on the cover note before signing.

PAM 2018 and IEM contract exclusion patterns

Private developer contracts on PAM 2018 (Persatuan Arkitek Malaysia) or IEM (Institution of Engineers Malaysia) standard forms have their own exclusion patterns. PAM 2018 requires CAR for the duration of the works plus the defects liability period, with the employer and all subcontractors named as insured. IEM forms add testing-and-commissioning clauses for M&E works (which is why EAR is often required alongside CAR for mixed projects).

The recurring failure mode on private contracts: the maintenance period and the defects liability period don't match. The PAM 2018 contract specifies a 24-month defects liability; the CAR cover note shows a 12-month maintenance period. The contractor signs both without noticing. A defect surfaces at month 18; the contractor goes back to fix it; in fixing it they damage the surrounding work; the CAR has expired six months earlier. The contractor pays out of pocket.

What to ask your intermediary at the quote stage

The exclusions schedule is usually 8-14 numbered clauses depending on insurer. The extensions are 5-10 line items. The interaction between them is where the actual cover lives. Three questions to ask before binding:

1. Which DE extension is on this policy? If the answer is "the standard one" or "DE3," ask whether DE4 or DE5 is needed for your project profile. Get the answer in writing.
2. Does the maintenance period match the defects liability period in my contract? If they don't match, the contract is in breach the day the policy ends.
3. Are all subcontractors named on the policy with cross-liability? Verify with the cover note, not the verbal assurance.

If the intermediary can't answer these in plain language, change intermediary. Specialist construction placement is the difference between a CAR that pays a claim and a CAR that has the right cover note number.

FAQ

Are CAR exclusions standard across insurers in Malaysia?

The 12 main exclusions covered above are broadly standard, derived from the international Munich Re Engineering wording. But the wording, sub-limits, and which DE extension is built in vary by insurer. Two policies that both say "all risks" can have different exclusion schedules.

Can I negotiate exclusions out of a CAR policy?

Most market-standard exclusions can't be removed, but some can be partially bought back through extensions (DE3/4/5, SRCC, terrorism, off-site storage). Whether the buy-back makes commercial sense depends on the project's specific risk profile and the principal contract's requirements.

What's the difference between an exclusion and a deductible?

Exclusion = the insurer doesn't pay at all for losses of that type. Deductible = the insurer pays losses of that type, but only the portion above a stated amount. Some risks are subject to both an exclusion (general) and a higher deductible (for the portion that's covered).

Does CAR cover damage caused by Acts of God like floods and storms?

Standard CAR covers damage from natural perils as a default. The exception is windstorm or named-cyclone events in some policies, which carry a specific deductible or sub-limit. Floods are usually covered, subject to the policy's flood deductible (often higher than the standard deductible).

If the principal contractor's CAR pays for damage I caused as a subcontractor, can I be sued personally?

If you're named as additional insured with cross-liability, the CAR pays on your behalf and waives subrogation against you. If you're not named, the principal's insurer can pay the principal and then come after you for the loss. Always verify your name is on the cover note before mobilising.

Is faulty workmanship the same as design defect?

No. Design defect = the design itself is wrong (consultant's PI). Faulty workmanship = the design is right, but the work was executed incorrectly (CAR with DE extension). They're separate exclusions and the policy responses are different.

What happens if I find an exclusion only after a claim is made?

The insurer will usually issue a written declinature citing the specific clause. You can dispute through the insurer's complaints process or through Ombudsman for Financial Services. But for most exclusions in standard wordings, a dispute is unlikely to overturn the declinature. Prevention at quote stage is the only reliable fix.

Does CAR cover damage to existing structures during renovation?

Only if the existing surrounding property extension is endorsed. Standard CAR is designed for greenfield construction. Renovation and fit-out work inside an operating facility needs the extension at policy inception, not after a fire.

How do I know if my CAR has a DE3, DE4, or DE5 extension?

It's stated on the policy schedule, usually in the section listing endorsements. If the schedule doesn't say, ask your intermediary in writing. "Implied" DE coverage isn't enforceable at claim stage.

Can I add an exclusion buy-back mid-project?

Sometimes, depending on the insurer and the buy-back. Mid-term endorsements for things like terrorism or extended maintenance are routine. Mid-term changes to fundamental terms like the DE extension are unusual and may require re-underwriting. Get extensions right at inception.

Foundation Conclusion

CAR exclusions don't fail contractors at quote stage. They fail at claim stage, when the cover note that looked right turns out not to cover the loss that actually happened.

The fix isn't to buy more cover. It's to match the cover to the project's actual exposure and to the principal contract's actual requirements. That's the conversation worth having before you bind.

Talk to our risk specialists about your CAR cover

Disclaimer: This article provides general guidance on Contractor's All Risks insurance available in the Malaysian market as of April 2026. Policy wordings, exclusion clauses, and extensions vary by insurer. Always review your specific policy schedule or consult a qualified insurance professional before making coverage decisions. Foundation is a specialist property and engineering insurance intermediary. We do not provide legal or contractual advice.