What Insurance Do Subcontractors Need in Malaysia? Complete Requirements Guide

Disclaimer: This article provides general guidance based on the Employees' Social Security Act 1969, Workmen's Compensation Act 1952, and standard Malaysian construction contract practices as of January 2025. Regulations may be amended. Always verify current requirements with SOCSO, CIDB, or qualified insurance professionals before making compliance decisions.

You've just won a subcontracting job worth RM800,000. The main contractor's CAR policy lists you as a named insured. You're covered, right?

Not entirely. Main contractor insurance typically covers the works, not your business risks, equipment, or the full scope of your liability exposure.

This guide covers:

• Statutory insurance requirements for Malaysian subcontractors
• What the main contractor's CAR policy actually covers (and what it doesn't)
• 7 essential insurance policies subcontractors should carry
• SOCSO and workmen's compensation obligations for your workforce
• Contract clauses that create hidden insurance obligations
• CIDB registration and insurance compliance

Why Main Contractor Insurance Isn't Enough for Subcontractors

Most subcontractors assume the project's Contractor's All Risks (CAR) policy provides complete protection. The reality is more complex.

CAR policies typically cover loss or damage to contract works and third-party liability arising from construction activities. Subcontractors may be named as co-insureds, but this coverage has significant limitations.

The catch? CAR policies commonly exclude defective workmanship, faulty design, mechanical breakdown of plant and equipment, and consequential losses. If the loss traces back to your work quality, you may find the policy doesn't respond.

Statutory Insurance Requirements for Malaysian Subcontractors

Malaysian law mandates certain insurance coverage. These aren't optional, regardless of what the main contractor provides.

SOCSO Coverage (Mandatory)

The Employees' Social Security Act 1969 (Act 4) requires all employers, including subcontractors, to register employees and make contributions to SOCSO (PERKESO).

Critical update for 2024: From 1 July 2024, foreign workers are covered under both the Employment Injury Scheme and the Invalidity Scheme. Previously, they only had Employment Injury coverage. The contribution wage ceiling is RM5,000 monthly.

Workmen's Compensation Insurance

The Workmen's Compensation Act 1952 (Act 273) applies to employees not covered by SOCSO. In practice, this primarily affects foreign workers whose SOCSO contributions are not current.

While SOCSO now covers foreign workers, you still need Workmen's Compensation Insurance for:

• Workers in the transition period before SOCSO registration completes
• Common Law liability exposure (SOCSO only covers statutory benefits)
• Claims exceeding SOCSO limits

Standard Common Law limit under Workmen's Compensation Insurance is RM1,000,000 per accident. This covers negligence claims where workers sue for damages beyond statutory benefits.

7 Essential Insurance Policies for Malaysian Subcontractors

Beyond statutory requirements, prudent subcontractors carry additional coverage. Your specific needs depend on your trade, subcontract value, and risk profile.

Contractor's All Risks: When Subcontractors Need Their Own Policy

Even when named on the main contractor's CAR policy, consider your own CAR coverage if:

• The main CAR sum insured doesn't adequately cover your subcontract value
• You're responsible for valuable free-issue materials
• The policy period doesn't align with your subcontract duration
• Exclusions apply to your specific trade or works

Public Liability: Your Defence Against Third Party Claims

Public Liability insurance covers your legal liability to third parties for bodily injury or property damage arising from your construction activities. This includes:

• Injury to site visitors, passersby, or neighbouring property occupants
• Damage to adjacent buildings or infrastructure
• Nuisance or trespass claims
• Legal defence costs

Typical limits range from RM500,000 to RM5,000,000. Higher-risk trades like demolition, piling, or work near existing structures should consider limits at the upper end.

Contractor's Plant and Machinery Insurance

Your excavator, crane, or compressor won't be covered under the main CAR policy unless specifically added. Contractor's Plant and Machinery (CPM) insurance covers:

• Accidental damage while operating, at rest, or during maintenance
• Theft and vandalism
• Fire and natural disasters
• Coverage extends across multiple project sites

The sum insured should equal replacement cost including freight, customs duties, and installation. Underinsurance triggers the average clause, leaving you exposed on claims.

CIDB Registration and Insurance Requirements

Registration with the Construction Industry Development Board (CIDB) under Section 25 of Act 520 is mandatory for all contractors undertaking construction work in Malaysia. This includes subcontractors.

CIDB grades determine the maximum subcontract value you can accept:

CIDB registration requires proof of adequate insurance coverage. G7 contractors specifically need comprehensive insurance policies covering all risks associated with project implementation.

Operating without CIDB registration carries penalties of RM10,000 to RM100,000 under Section 29 of Act 520.

Contract Clauses That Create Insurance Obligations

Your subcontract agreement likely contains clauses that mandate specific insurance coverage. These create binding obligations beyond statutory requirements.

Common Contractual Insurance Requirements

Back-to-Back Subcontract Arrangements

Many subcontracts operate on a "back-to-back" basis, flowing main contract obligations down to subcontractors. This includes insurance requirements.

Under PAM Contract 2018 and similar standard forms, the main contractor's insurance must cover subcontractors. But the subcontract may require you to maintain separate cover for:

• Your own plant and equipment
• Your workforce (SOCSO and Workmen's Compensation)
• Professional liability (for design elements)
• Motor vehicles

Review your subcontract carefully. The consequences of non-compliance include termination rights for the main contractor and inability to claim losses from their insurance.

Foreign Worker Insurance: 2024 SOCSO Changes

If you employ foreign workers, recent regulatory changes significantly impact your obligations.

Key Changes from July 2024

Before July 2024: Foreign workers only covered under Employment Injury Scheme (1.25% employer contribution).

From July 2024: Foreign workers under 60 now covered under both Employment Injury and Invalidity Schemes (1.75% employer + 0.5% employee contribution).

Non-compliance penalties include fines up to RM10,000, imprisonment, and interest on late contributions.

Subcontractor Insurance Checklist by Trade

Insurance needs vary by specialisation. Here's what different subcontractor types should prioritise.

What Happens When Insurance Claims Arise

Understanding the claims process helps you prepare for potential incidents.

CAR Policy Claims Involving Subcontractors

When damage occurs to subcontract works covered under the main CAR policy:

1. Notify the main contractor immediately (usually within 24-48 hours)
2. Main contractor notifies their insurer
3. Loss adjuster investigates cause and extent
4. If your workmanship caused the loss, expect coverage disputes
5. Your own insurance may need to respond if the CAR excludes the loss

Subrogation Considerations

Even when named as co-insured, insurers may attempt subrogation against subcontractors whose negligence caused the loss. Joint names policies and waiver of subrogation clauses provide protection, but only if properly worded.

Check your subcontract for cross-liability provisions. Without them, you may face claims from other parties insured under the same policy.

How to Verify Your Insurance Coverage is Adequate

Use this framework to assess your current insurance position.

FAQ

Is the main contractor's CAR insurance enough for subcontractors?

No. While main contractor CAR policies typically name subcontractors as co-insureds, coverage has significant gaps. Your plant and equipment, defective workmanship costs, professional liability, and losses exceeding policy limits or falling within exclusions won't be covered. You need your own policies for complete protection.

What insurance is legally required for subcontractors in Malaysia?

SOCSO coverage is mandatory for all employees under the Employees' Social Security Act 1969. From July 2024, foreign workers must also be covered under both Employment Injury and Invalidity Schemes. Beyond statutory requirements, your subcontract agreement typically mandates additional coverage like Public Liability insurance.

Do CIDB registered contractors need specific insurance?

CIDB registration requires contractors to demonstrate adequate insurance coverage for project implementation. G7 contractors specifically need comprehensive insurance policies. While CIDB doesn't mandate specific policy types, operating without proper coverage may affect your registration status and ability to secure subcontracts.

What Public Liability limit should subcontractors carry?

Most subcontracts require minimum Public Liability limits of RM1,000,000 to RM2,000,000. Higher-risk trades like demolition, piling, or work near existing structures should carry RM5,000,000 or more. Check your subcontract insurance clause for specific requirements.

Are foreign workers covered under SOCSO in 2025?

Yes. From 1 July 2024, foreign workers are covered under both the Employment Injury Scheme and Invalidity Scheme, the same as Malaysian workers. Employer contribution is 1.75% of wages, with employees contributing 0.5%. The wage ceiling for contributions is RM5,000 monthly.

What happens if a subcontractor doesn't have insurance required by the contract?

The main contractor can refuse site access, terminate the subcontract for breach, or take out insurance on your behalf and deduct premiums from your payments. More critically, you'll be personally liable for any losses that would otherwise be insured.

Do I need Professional Indemnity insurance as a subcontractor?

You need Professional Indemnity if your subcontract involves design responsibilities, specialist engineering, or professional advice. M&E contractors, facade specialists, and design-build subcontractors typically require PI cover. Standard limits range from RM500,000 to RM2,000,000.

Can main contractors claim against subcontractors if the CAR policy covers the loss?

It depends on the policy wording and subcontract terms. Joint names policies typically prevent subrogation between co-insureds. But if your negligence caused the loss and the policy excludes it, or if there's a contractual indemnity obligation, you may still face claims.

What's the penalty for not registering workers with SOCSO?

Employers face fines up to RM10,000, potential imprisonment, and interest charges on late contributions. Beyond penalties, unregistered workers who suffer injuries can sue you directly, with no SOCSO protection to limit your liability.

Should subcontractors get their own CAR policy if named on the main contractor's?

Consider your own CAR policy if: the main policy sum insured doesn't adequately cover your subcontract value; you're responsible for expensive free-issue materials; the policy period doesn't match your subcontract duration; or if specific exclusions apply to your trade. For smaller subcontracts with straightforward scope, relying on the main CAR may be sufficient.

Foundation Conclusion

Main contractor insurance provides a foundation, not a fortress. Subcontractors face unique exposures that project-wide policies don't fully address, from equipment assets to workforce obligations to professional liability gaps.

The right insurance strategy balances coverage needs against premium costs, ensuring you're protected without paying for redundant policies. This requires understanding what the main contractor's insurance actually covers for your scope, and where the gaps lie.

Talk to our construction insurance specialists about your subcontractor coverage needs