You Have CAR Insurance. But Are You Actually Covered?

Disclaimer: This article provides general guidance on insurance coverage available in the Malaysian market as of February 2026. Policy terms, conditions, and availability vary by insurer. Always review your specific policy wording or consult a qualified insurance professional before making coverage decisions.

You Have CAR Insurance. But Are You Actually Covered?

You bought a Contractor's All Risk (CAR) policy for your project. The certificate sits in your site office. You assume you're covered.

Here's the thing: most contractors in Malaysia carry CAR insurance without understanding what it actually excludes, what deductibles apply when monsoon floods hit, or why a defective workmanship claim gets rejected even though the policy says "all risks." The name is misleading, and that gap between perception and reality is where financial disasters happen.

If you've never read your policy wording cover to cover, this article is for you. The exclusions, traps, and mistakes below cost contractors hundreds of thousands in unrecovered losses every year.

What you'll learn:

• Why "all risks" doesn't mean what you think it means
• The specific exclusions that catch contractors off-guard in Malaysia
• How LEG 1, LEG 2, and LEG 3 clauses determine whether defective work is covered
• Under-insurance penalties that slash your payout by half or more
• Deductible structures that surprise you at claim time, especially during monsoon season
• Extensions you should have purchased but probably didn't
• Why CAR alone isn't enough and what other policies you still need
• Common claims mistakes that reduce or void your settlement

If you need the fundamentals first, start with our complete guide to Contractor's All Risk insurance in Malaysia. This article assumes you already have CAR and focuses on what you're probably missing.

The "All Risks" Misnomer: What Your Policy Name Actually Means

The phrase "all risks" creates a dangerous false sense of security. Contractors hear it and assume everything is covered. That's not how insurance works.

In insurance law, "all risks" means the policy covers any accidental loss or damage that isn't specifically excluded. The burden of proof shifts: the insurer must show an exclusion applies rather than you proving a peril is covered. But the exclusions list in a standard CAR policy is long, specific, and full of surprises.

What Contractors Assume	What the Policy Actually Says
"All risks" = everything is covered	All risks of accidental loss or damage except what's listed in the exclusions
Defective work is covered because it's an accident	Cost of replacing defective work itself is excluded; only resultant damage may be covered depending on your LEG clause
My full project value is protected	If you're under-insured, the average clause reduces every claim proportionally
Flood damage is automatically included	Flood may be covered, but with separate (much higher) deductibles and possible sub-limits
Third-party injuries on site are covered	Section II covers third-party liability, but your own workers are excluded; you need Workmen's Compensation for that
Delay costs after damage are recoverable	Consequential losses including penalties, liquidated damages, and loss of profit are explicitly excluded

The takeaway is straightforward. Your CAR policy is a named-exclusion policy dressed up in an "all risks" label. Every contractor should read the exclusions section of their policy wording, not just the coverage summary.

Top Exclusions That Catch Contractors Off-Guard

Standard CAR policy exclusions in the Malaysian market follow international conventions, but many contractors only discover them at claim time. Below is a detailed breakdown of the exclusions you're most likely to run into.

Section I (Material Damage) Exclusions

Exclusion Category	What It Means in Practice	Why It Catches Contractors
Defective workmanship, materials, or design (the defective part itself)	The cost to redo or replace the defective item is not covered. Only resultant damage to other parts may be covered, depending on LEG clause	Contractors expect rework costs to be insured
Wear and tear, corrosion, oxidation, deterioration	Gradual degradation of materials on site is not accidental damage	Long-duration projects in tropical climates see material degradation
Consequential losses (delay, penalties, loss of profit, loss of contract)	CAR only covers physical damage. Financial losses from project delays are excluded entirely	Contractors assume delay costs after an insured event are recoverable
Mechanical/electrical breakdown of construction plant	Internal breakdown of cranes, excavators, or generators is excluded. Only damage from external causes is covered	A crane's hydraulic system failure isn't an "accident" under CAR
War, terrorism, nuclear risks	Standard geopolitical exclusions	Rarely an issue in Malaysia but always present in wordings
Inventory shortages discovered during stocktaking	Missing materials found only during periodic checks, with no evidence of a specific loss event, are excluded	Material theft on construction sites is common, but you need evidence of a specific incident
Damage to files, drawings, accounts, data	Loss of documents, software, or digital data is not physical damage to the works	BIM files and project plans have no coverage under CAR
Existing property belonging to or in the care of the insured	Damage to your own existing buildings adjacent to the project is not covered under Section I	Contractors assume site-wide coverage

For a deeper dive into every exclusion category, see our dedicated CAR exclusions guide.

Section II (Third-Party Liability) Exclusions

Section II covers your liability to third parties for bodily injury or property damage arising from the construction works. But it has its own exclusion set that creates gaps.

Excluded Under Section II	What You Need Instead
Bodily injury to your employees	Workmen's Compensation Insurance
Damage to the contract works themselves	Covered under Section I, not Section II
Liability arising from use of motor vehicles on public roads	Separate motor insurance policy
Liability arising from professional advice or design	Professional Indemnity Insurance
Damage to property caused by vibration, removal or weakening of support	Comprehensive General Liability (CGL) policy with broader coverage

The bottom line: Section II is not a substitute for Comprehensive General Liability insurance. Its scope is limited to liability arising directly from the insured construction works.

The Defective Workmanship Trap: LEG Clauses Explained

This is the single biggest misunderstanding in CAR insurance. Every standard policy excludes the cost of replacing defective work. But the question of whether resultant damage from that defect is covered depends entirely on which LEG clause is written into your policy.

LEG stands for the London Engineering Group, a consultative body of insurers and reinsurers in the London construction insurance market. They developed three model exclusion clauses that define how defective workmanship is handled. Almost every CAR policy in Malaysia uses one of them.

LEG 1/96: The Outright Exclusion

LEG 1/96 excludes all loss or damage due to defects of workmanship, materials, or design. This means both the defective item and any damage it causes to other parts of the works are excluded. You get no cover at all for defect-related losses.

LEG 2/96: The Consequences Exclusion

LEG 2/96 excludes the cost of remedying the defective workmanship, materials, or design, but covers resultant damage to non-defective parts of the works. The measure is to exclude the costs that "would have been incurred had the defect been remedied immediately prior to the damage occurring."

This is the most common clause in Malaysian CAR policies. It protects you from cascade damage while still excluding the rework cost itself.

LEG 3/06: The Improvement Exclusion

LEG 3/06 is the narrowest exclusion and most favourable to the contractor. It covers both the defective part and the resultant damage. The only thing excluded is any cost incurred to improve the original design, materials, or workmanship beyond what was originally specified.

LEG Clause	Cover for Defective Item	Cover for Resultant Damage	What's Excluded	Contractor Friendliness
LEG 1/96	Not covered	Not covered	All loss or damage arising from the defect	Least favourable
LEG 2/96	Not covered	Covered	Only the cost to remedy the defect itself (as if fixed immediately before the loss)	Mid-range (most common)
LEG 3/06	Covered	Covered	Only the cost of improvements beyond original specifications	Most favourable

A Practical Scenario

Imagine a subcontractor installs waterproofing membrane incorrectly on a podium deck. Months later, water infiltration damages the structural slab below and ruins completed ceiling finishes on the floor beneath.

Cost Component	LEG 1/96	LEG 2/96	LEG 3/06
Redo waterproofing membrane (the defective work)	Excluded	Excluded	Covered
Repair damaged structural slab (resultant damage)	Excluded	Covered	Covered
Replace ruined ceiling finishes (resultant damage)	Excluded	Covered	Covered
Upgrade to better membrane system (improvement)	Excluded	Excluded	Excluded

The difference between LEG 1 and LEG 3 on a single incident can be massive. Yet most contractors don't know which clause is in their policy. Check your wording now. If you see LEG 1/96, you have the weakest protection available, and you should talk to your broker about upgrading to LEG 2/96 at minimum.

Under-Insurance and the Average Clause

This is one of the most punishing traps in construction insurance, and it's entirely self-inflicted. If your sum insured is less than the full contract value (including variations, escalation, and materials supplied by the employer), your claim payout gets slashed proportionally.

How the Average Clause Works

The average clause (also called the "condition of average") states that if the sum insured is less than the actual value at risk at the time of loss, the insurer will only pay a proportional share of the claim. The formula is simple but brutal:

Claim Payout = Loss Amount x (Sum Insured / Actual Value at Risk)

Scenario	Sum Insured	Actual Project Value	Loss Amount	Payout After Average	Shortfall You Bear
Correctly insured	RM50 million	RM50 million	RM5 million	RM5 million	Nil
Under-insured by 20%	RM40 million	RM50 million	RM5 million	RM4 million	RM1 million
Under-insured by 40%	RM30 million	RM50 million	RM5 million	RM3 million	RM2 million

That RM2 million shortfall comes straight out of your pocket. And the insurer applies this reduction even on partial losses, not just total losses.

Common Causes of Under-Insurance in Malaysia

Under-insurance rarely happens because a contractor deliberately chose a low sum insured. It happens because of oversights that accumulate during the project.

• Variation orders (VOs) not reflected: Your project started at RM40 million but VOs pushed it to RM52 million. If you didn't update your sum insured, you're 23% under-insured
• Employer-supplied materials excluded: Materials provided by the developer or client still form part of the contract works. If they're not included in the sum insured, the average clause applies
• No escalation provision: Construction costs in Malaysia can increase during a multi-year project due to material price fluctuations. Without an escalation clause, you fall behind
• Professional fees and debris removal omitted: The cost to rebuild includes architect/engineer fees and clearing wreckage. These should be included in the sum insured or added as extensions
• Insuring only the main contractor's portion: If you're the main contractor but subcontractors bring their own materials and labour, the full contract value includes their work too

The fix is simple: review your sum insured at every major variation order, and include a 10-15% escalation clause as a buffer. For more on getting these numbers right from the start, see our construction insurance checklist for site mobilisation.

Deductible Structures That Surprise Contractors

Your deductible (also called the "excess") is the amount you bear on every claim before the insurer pays. Most contractors know they have a deductible. What they don't realise is that CAR policies often have multiple deductibles that vary by peril, and the ones for natural catastrophes can be shockingly high.

How CAR Deductibles Are Structured

Peril Type	Typical Deductible Structure	Why It Matters in Malaysia
General perils (fire, impact, collapse)	Fixed amount, e.g. RM10,000 to RM50,000 per occurrence	Manageable and expected
Flood / inundation	Often a percentage of total sum insured (e.g. 1-5%) or a high fixed amount, with possible sub-limits	Northeast monsoon hits Kelantan, Terengganu, Pahang, and Johor annually. A 2% deductible on a RM100 million project means RM2 million out of pocket
Earthquake / earth tremor	Percentage-based, typically 2-5% of total values per occurrence	Sabah projects face higher seismic risk. Earthquake deductibles can be substantial
Landslide / subsidence	Higher fixed amount or percentage-based	Hill-site developments in Cameron Highlands, Genting, or Penang Hill face elevated exposure
Third-party liability (Section II)	Separate deductible for bodily injury vs. property damage claims	Property damage deductibles are usually higher than bodily injury deductibles
Testing and commissioning	Higher deductible than the standard construction phase excess	Damage during testing is riskier; insurers charge accordingly

The Monsoon Deductible Problem

Malaysia's northeast monsoon season (November to March) brings severe flooding to the east coast and southern states almost every year. Insurers know this. That's why flood deductibles in CAR policies for Malaysian projects are often structured as a percentage of the sum insured rather than a flat amount.

On a RM80 million project with a 2% flood deductible, you bear the first RM1.6 million of every flood loss. If monsoon rains cause three separate flood events in one season, you bear that deductible each time. And if your project is in a known flood-prone area like Kuala Krai or Segamat, some insurers may impose even higher deductibles or sub-limits on flood coverage.

The catch? Many contractors don't check their flood deductible until after a loss. By then, it's too late to negotiate.

Extensions You Should Have But Probably Don't

A base CAR policy covers the contract works. But "the contract works" is narrower than you think. Extensions widen your coverage for costs and exposures that the standard wording excludes or limits. Most extensions are available for an additional premium, and many are worth every ringgit.

Extension	What It Covers	Why You Probably Need It	Typical Limit
Removal of debris	Cost of clearing and disposing of damaged materials after a loss	After a collapse or flood, debris removal can represent a significant portion of recovery costs	Typically 10% of project value
Professional fees	Architect, engineer, and surveyor fees for redesign and repair supervision	You can't rebuild without professionals. These fees aren't covered under the base wording	Typically 10% of project value
Escalation clause	Automatic increase in sum insured to cover cost inflation during the project	Prevents under-insurance on multi-year projects where material costs rise	Typically 10-15% of original sum insured
Expediting expenses	Overtime and express delivery costs to speed up repairs after insured damage	After a major loss, you'll want to accelerate recovery to avoid liquidated damages from the client	Sub-limited, varies by insurer
Off-site storage	Materials stored at a location away from the project site	Precast elements, steel structures, and MEP components are often fabricated and stored off-site	Sub-limited, needs declaration
Materials in transit	Damage to construction materials while being transported to the site	A lorry carrying imported tiles or structural steel that overturns on the way to site isn't covered under standard CAR	Sub-limited per conveyance
Extended maintenance / defects liability period	Coverage continues during the DLP for damage caused by the contractor returning to site	Standard DLP cover is limited to damage caused by the contractor while on site for defect rectification. This extension broadens it	Usually 12-24 months
50/50 clause (principal's existing property)	Damage to the employer's existing structures adjacent to or within the project site	Renovation and extension projects where you're working next to occupied buildings	Specified limit

A lean CAR policy without these extensions might save you on premium, but it exposes you to costs that are entirely foreseeable. Talk to your broker about which extensions are already included and which need to be added.

CAR vs Other Policies You Still Need

One of the most dangerous assumptions in construction insurance is that a CAR policy is a complete solution. It isn't. CAR covers the contract works and limited third-party liability related to those works. But a construction project generates risks that sit outside the CAR wording entirely.

Risk	Covered by CAR?	Policy You Need	Why
Worker injury or death on site	No	Workmen's Compensation (WC)	Mandatory under the Workmen's Compensation Act 1952 and the Employees' Social Security Act 1969 (SOCSO). Your employees are excluded from CAR Section II
Liability to the public beyond the construction site perimeter	Limited	Comprehensive General Liability (CGL)	CAR Section II only covers liability arising from the construction works. CGL provides broader coverage for your business operations
Mechanical/electrical installation risks	Partial	Erection All Risk (EAR)	Projects with significant M&E components may need EAR for the erection, installation, and testing phase
Design errors by the contractor	No	Professional Indemnity (PI)	If you provide design services, negligence claims aren't covered by CAR
Subcontractor default	No	Contractual protections + subcontractor insurance requirements	CAR covers physical damage from all parties, but a subcontractor's financial failure or abandonment isn't an insurable peril
Construction plant and equipment breakdown	External damage only	Machinery Breakdown Insurance	CAR covers your crane if it's hit by falling debris. It doesn't cover internal mechanical failure
Vehicles used on public roads	No	Motor Insurance	Vehicles leaving the construction site boundary need separate motor coverage

The point is clear: CAR is one piece of a construction insurance program, not the whole program. If you want to understand the full picture, our CAR and EAR insurance page explains how these policies work together.

Claims Mistakes That Reduce Your Payout

Even when a loss is genuinely covered, contractors often make errors in the claims process that reduce or delay their settlement. Insurance adjusters look for reasons to limit payouts. Don't give them one.

The Most Common Claims Mistakes

Mistake	What Happens	How to Avoid It
Late notification	Most policies require notification within 14 days of the loss (or immediately for serious incidents). Late notification can void your claim or give the insurer grounds to reduce it	Notify your broker and insurer on the same day. Don't wait for the full picture
Cleaning up before documenting	You remove debris or start repairs before the loss adjuster inspects. The insurer disputes the extent of damage	Photograph and video everything first. Keep damaged materials where possible. Only take emergency measures to prevent further loss
Poor record-keeping	You can't prove the value of materials lost or the cost of reinstatement because site records are incomplete	Maintain daily site diaries, delivery orders, material invoices, and progress photos. These are your evidence
Mixing covered and uncovered costs	Your claim bundles insured damage with excluded items (e.g. including delay costs or betterment). The adjuster rejects the whole claim or applies heavy discounts	Separate your claim into clearly defined categories that match the policy wording
Failing to mitigate further damage	After initial damage, you're required to take reasonable steps to prevent it from getting worse. If you don't, the insurer can reduce the payout for the additional damage	Install temporary protection, pump out water, shore up structures. Document every mitigation step and keep receipts
Not reading the policy before claiming	You claim for something that's explicitly excluded, wasting time and creating friction with the insurer	Review your policy wording before submitting. Match each claim item to the relevant coverage section
Accepting the first settlement offer	Loss adjusters may undervalue the claim. The first offer isn't always the final answer	Get your own quantity surveyor's assessment. Negotiate with evidence
Not involving your broker early	You deal directly with the insurer without your broker's advocacy and technical knowledge	Your broker works for you, not the insurer. Get them involved from day one of the claim

Claims Process Best Practice

Follow this sequence after any loss event:

1. Secure the site and take emergency mitigation measures to prevent further damage
2. Document everything with photos, video, measurements, and witness statements before any cleanup
3. Notify your broker and insurer within 24 hours (formal written notice within the policy's required period, typically 14 days)
4. Preserve damaged materials for inspection by the loss adjuster
5. Compile supporting documents: delivery orders, invoices, contracts, daily site diaries, progress reports
6. Prepare a detailed claim submission that separates costs into categories matching the policy wording
7. Engage your own QS or independent adjuster if the claim is large or contested

Self-Assessment Checklist: Is Your CAR Policy Actually Protecting You?

Use this checklist to audit your current CAR coverage. If you answer "No" or "Don't Know" to more than three items, you have serious gaps that need immediate attention.

Check Item	Yes	No	Don't Know
I know which LEG clause (1, 2, or 3) is in my policy	☐	☐	☐
My sum insured reflects the current contract value including all variation orders	☐	☐	☐
Employer-supplied materials are included in the sum insured	☐	☐	☐
I have an escalation clause to cover cost inflation	☐	☐	☐
I know my flood/natural peril deductible amount or percentage	☐	☐	☐
Removal of debris and professional fees extensions are included	☐	☐	☐
Off-site storage and materials in transit are covered	☐	☐	☐
I have separate Workmen's Compensation coverage for all site workers	☐	☐	☐
I have Comprehensive General Liability (CGL) coverage beyond the project site	☐	☐	☐
My policy period covers the full construction timeline including any approved extensions of time (EOT)	☐	☐	☐
My defects liability period (DLP) cover is activated and the correct duration is specified	☐	☐	☐
All named subcontractors are listed on the policy or covered through the main contractor's wording	☐	☐	☐
I have a documented claims notification procedure my site team knows about	☐	☐	☐
I've read the full exclusions section of my policy wording (not just the summary)	☐	☐	☐

If this checklist revealed gaps, don't wait for a loss event to fix them. Contact your broker or reach out to Foundation for a policy review.

Frequently Asked Questions

Does "all risks" in a CAR policy mean everything is covered?

No. "All risks" means the policy covers any accidental physical loss or damage that is not specifically excluded. The exclusions list in a standard CAR policy is extensive. It excludes defective workmanship costs, consequential losses, wear and tear, mechanical breakdown, war, and more. You should read the exclusions section of your policy wording to understand your actual coverage boundaries.

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

These are defective workmanship exclusion clauses developed by the London Engineering Group. LEG 1/96 excludes all loss from defects, including resultant damage. LEG 2/96 excludes the cost of fixing the defect itself but covers resultant damage to other parts of the works. LEG 3/06 covers both the defective part and resultant damage, only excluding costs of improvements beyond the original specification. LEG 2/96 is the most common in Malaysia. LEG 3/06 is the most contractor-friendly.

What is the average clause and how does it affect my CAR claim?

The average clause penalises you for under-insurance. If your sum insured is lower than the actual value at risk, your claim payout is reduced proportionally. For example, if your project is worth RM50 million but you only insured RM40 million, the insurer will only pay 80% of any claim. This applies to partial losses too, not just total losses.

Are flood losses covered under a standard CAR policy in Malaysia?

Flood is generally an insured peril under CAR, but it typically carries a much higher deductible than standard perils. In some cases, the flood deductible is expressed as a percentage of the total sum insured (e.g. 1-5%), which can mean hundreds of thousands or millions of ringgit on large projects. Some policies also impose sub-limits on flood coverage or require additional endorsement for high-risk locations.

Why do I still need Workmen's Compensation if I have CAR insurance?

CAR Section II covers liability to third parties, not to your own employees. Worker injuries and deaths on site are explicitly excluded from CAR's third-party liability section. Workmen's Compensation insurance is a separate, legally mandatory policy that covers your employees for workplace injuries, occupational diseases, and death.

Can I claim for project delays caused by insured damage under CAR?

No. Consequential losses, including project delays, liquidated damages (LAD), loss of profit, and penalties, are explicitly excluded from standard CAR policies. CAR only covers the physical repair or reinstatement cost. You can purchase expediting expenses as an extension to cover overtime and express delivery costs for faster repairs, but the delay itself is not insurable under CAR.

What happens if my project period extends beyond the CAR policy expiry?

If your project overruns and your CAR policy expires, you have no coverage for the remaining construction period. You must request an extension of the policy period from your insurer before the original expiry date. Running without cover, even for a few weeks, is a serious risk. Extensions of time (EOT) granted to the contractor should be matched with corresponding insurance extensions.

Do my subcontractors need their own CAR insurance if I already have one?

It depends on your contract structure. A project-wide CAR policy typically covers all parties working on the contract works, including subcontractors. But you should verify that your policy wording includes subcontractors as insured parties. Some main contractors also require subcontractors to carry their own liability insurance. See our subcontractor insurance guide for the details.

How do I know if I'm under-insured on my CAR policy?

Compare your current sum insured against the total completed contract value, including all approved variation orders, employer-supplied materials, professional fees, and debris removal provisions. If the sum insured is lower, you're under-insured and the average clause will reduce every claim. A quick test: add up your original contract value, all VOs to date, and a 10-15% buffer for escalation. If your sum insured is below that number, you need an adjustment.

Is there a difference between CAR and EAR insurance?

Yes. CAR (Contractor's All Risk) covers civil construction projects such as buildings, roads, bridges, and infrastructure. EAR (Erection All Risk) covers the erection and installation of machinery, plant, and steel structures. Some projects need both, especially those with significant mechanical and electrical components. Our EAR vs CAR comparison guide explains when each applies.

Close the Gaps Before a Loss Closes Your Project

Having a CAR policy is not the same as being properly covered. The exclusions, deductible structures, LEG clauses, and under-insurance traps discussed in this article are not theoretical risks. They're the real reasons contractors in Malaysia face unrecovered losses every year.

The good news: every one of these gaps is fixable. An experienced broker can review your policy wording, identify the blind spots, and recommend specific changes, whether that's upgrading your LEG clause, adjusting your sum insured, adding extensions, or structuring your deductibles properly.

Foundation specialises in construction and engineering insurance for the Malaysian market. We work with contractors, developers, and project owners to structure CAR coverage that actually protects, not just one that satisfies a contract requirement. If this article raised questions about your current policy, we want to hear from you.

Request a free CAR policy review from Foundation. We'll assess your current coverage, identify gaps, and recommend improvements, with no obligation.