Construction Insurance Checklist Malaysia: Essential Cover Before Site Mobilisation

Disclaimer: This article provides general guidance based on the Occupational Safety and Health Act 1994, Workmen's Compensation Act 1952, and CIDB Act 520 as of January 2025. Regulations may be amended. Always verify current requirements with DOSH, CIDB, or qualified insurance professionals before making compliance decisions.

You've won the tender. The Letter of Award is signed. Now what?

Before a single excavator enters your site, you need specific insurance policies and financial securities in place, or you risk project delays, contract breaches, and personal liability exposure.

This guide covers:

• Essential insurance policies required before site mobilisation
• Financial securities and bonds for government and private contracts
• CIDB and regulatory compliance requirements
• Common coverage gaps that expose contractors to claims
• Pre-mobilisation checklist with timelines

Why Insurance Must Be Arranged Before Site Mobilisation

Malaysian construction contracts impose strict insurance obligations on contractors. Under most standard forms, including PAM 2018, PWD 203, and CIDB 2022, failure to arrange required insurance before commencing works can constitute a breach of contract.

The consequences are severe. Your Letter of Award becomes void. The employer can terminate and claim damages. You carry unlimited personal liability for any incident on site.

Essential Insurance Policies for Construction Projects

Every construction project in Malaysia requires a minimum set of insurance policies. The specific requirements depend on contract value, project type, and whether it's government or private work.

Contractor's All Risks (CAR) Insurance

CAR insurance is your primary protection for the physical works. It covers sudden and unforeseen damage to the contract works, materials on site, temporary works, and construction plant during the construction period.

When to arrange: Before site mobilisation. Insurers will not issue policies after works have commenced, as they cannot assess whether existing damage occurred before or after inception.

Critical: The sum insured must include the full contract value, temporary works value, construction plant, estimated debris removal costs, professional fees, and an allowance for inflation. Under-insurance triggers average clauses that reduce claim payouts proportionally.

Workmen's Compensation Insurance

Under the Workmen's Compensation Act 1952, employers must compensate workers for injuries or occupational diseases arising from employment. This is mandatory for workers not covered by SOCSO, which includes all foreign construction workers.

Malaysian citizens and permanent residents contributing to SOCSO are covered under the Employees' Social Security Act 1969. Foreign workers are not eligible for SOCSO and must be covered under separate Workmen's Compensation policies.

Standard Workmen's Compensation policies cover statutory liability under the Act plus Common Law liability. The Common Law limit is typically RM1,000,000 per accident, protecting you if workers sue for negligence beyond statutory compensation amounts.

Erection All Risks (EAR) Insurance

EAR insurance applies to projects involving erection, installation, and commissioning of machinery, plant, and steel structures. If your project involves significant mechanical and electrical installation work, you may need EAR instead of, or in addition to, CAR insurance.

The key difference: EAR includes testing and commissioning coverage as standard, which is critical for industrial plant projects where machinery must be tested before handover.

Public Liability Insurance

While CAR Section II provides third-party liability cover for incidents arising from construction works, some contracts require separate Public Liability policies with higher limits. Government contracts under PWD forms often specify minimum liability limits.

Check your contract specifications carefully. Relying solely on CAR Section II when a separate PL policy is required may constitute non-compliance.

Financial Securities and Bonds

Beyond insurance, construction contracts require financial securities that guarantee your performance and protect the employer against contractor default.

Performance Bond

Performance bonds are standard in Malaysian construction contracts, particularly government projects. They guarantee the contractor will perform according to contract terms. If you default, the employer can call on the bond to recover losses.

In Malaysia, performance bonds are typically structured as on-demand instruments. The employer can call on the bond without proving contractor default. Courts will only restrain a bond call in cases of proven fraud or unconscionable conduct, which are extremely rare.

Timing matters: Most contracts require the performance bond within 14 days of Letter of Award. Missing this deadline can void your contract before you even start.

Insurance Guarantee for Foreign Workers

Employers hiring foreign workers must provide an Insurance Guarantee to the Malaysian Immigration Department as a security deposit. This is separate from Workmen's Compensation coverage. Without it, you cannot obtain work permits for your foreign workforce.

CIDB Compliance Requirements

Under Section 25 of Act 520 (Amendment 2011), all contractors must register with the Construction Industry Development Board (CIDB) before undertaking construction work in Malaysia. Operating without valid CIDB registration carries fines of RM10,000 to RM100,000 under Section 29.

CIDB Registration Grades

CIDB classifies contractors into seven grades based on tender capacity and paid-up capital. Your registration grade determines the maximum project value you can undertake.

CIDB Green Card Requirements

All construction personnel must hold valid CIDB registration. The Construction Personnel Registration (CPR) system issues Green Cards to workers who have completed the mandatory Safety and Health Induction for Construction Workers (SICW) training.

Workers without valid Green Cards cannot legally work on Malaysian construction sites. The CIDB Construction Personnel Protection Plan provides coverage to registered workers, but those without valid registration are excluded from protection.

DOSH Requirements

The Department of Occupational Safety and Health (DOSH) administers OSHA 1994 requirements affecting construction sites.

Construction sites meeting certain thresholds must appoint a qualified Safety and Health Officer (SHO). Sites with 40 or more workers, or where hazardous work is performed, typically require SHO appointment.

You may also need to establish a Safety and Health Committee if your site employs 40 or more workers. Understanding how to form and run a Safety Committee is essential before mobilisation.

Common Coverage Gaps to Avoid

Many contractors arrange the minimum required insurance without understanding what's actually covered. These gaps become painfully apparent when claims are denied.

FAQ

Who is responsible for arranging CAR insurance, the employer or contractor?

This depends on your contract terms. Under PAM forms, the contractor typically arranges CAR insurance in joint names of employer and contractor. Under some PWD forms, the employer may arrange insurance. Always check your specific contract requirements, as getting this wrong means one party has no coverage.

What happens if my CAR policy expires mid-project due to delays?

You must extend the policy to cover the extended construction period. Operating without valid coverage exposes you to full liability for any incident. Most insurers require extension requests before the original expiry date, with additional premium based on the extended period.

Do I need separate insurance for each subcontractor?

Not necessarily. Your CAR policy can cover all contractors and subcontractors working on the project if structured correctly. But you should verify each subcontractor has valid Workmen's Compensation for their workers. Without this, you may face claims from their injured workers under Common Law.

Can I start site preparation works before insurance is in place?

No. Site clearance, excavation, and any physical works are covered construction activities. Starting without insurance means you carry full liability for any damage or injury from day one. Insurers will not backdate policies to cover work already commenced.

What's the difference between CAR and EAR insurance?

CAR covers building and civil engineering construction. EAR covers erection, installation, and commissioning of machinery and plant. If your project involves significant mechanical installation, testing, and commissioning, EAR may be more appropriate. Some projects require both policies for different work packages.

How much does CAR insurance cost in Malaysia?

Premiums depend on project value, type of works, location, and risk profile. Building construction typically ranges from 0.08% to 0.15% of contract value. Civil engineering works may be higher due to increased risk. Specialist engineering projects command premium rates based on specific risk assessment.

Is professional indemnity insurance required for contractors?

If your contract includes design responsibility (design-build contracts), you should carry Professional Indemnity insurance. This covers claims arising from design errors or omissions. Standard CAR policies exclude design defect cover. For traditional contracts where the employer's consultants design, PI is their responsibility.

What are the penalties for working without valid CIDB registration?

Under Section 29 of Act 520, contractors working without valid CIDB registration face fines from RM10,000 to RM100,000. CIDB can also issue a stop-work notice under Section 30, halting your project entirely. Beyond fines, you risk being barred from future government tenders.

Do foreign workers need CIDB Green Cards?

Yes. All construction personnel, including foreign workers, must hold valid CIDB registration and Green Cards before entering construction sites. Workers without valid Green Cards are not covered under the CIDB Construction Personnel Protection Plan. Employers face fines up to RM5,000 per unregistered worker.

What insurance do I need for construction plant and equipment?

CAR policies can include construction plant as an optional extension, covering damage while on site. For mobile equipment used across multiple projects, a standalone Plant and Machinery Insurance policy may be more cost-effective. Consider loss of use cover if equipment breakdown would delay your project significantly.

Foundation Conclusion

Insurance and bonds are not administrative afterthoughts. They're contractual obligations that must be fulfilled before breaking ground. Missing even one requirement can void your contract, expose you to unlimited liability, and attract regulatory penalties under OSHA 1994 and CIDB Act 520.

The right insurance structure does more than satisfy contract terms. It protects your company's financial position, ensures worker welfare, and demonstrates the professional approach that wins repeat business. Getting it wrong costs far more than the premium you thought you were saving.

Talk to our construction insurance specialists about your next project