By Pooba Mahalingam & P.K. Modi
The Contractors All Risks (CAR) policy is normally taken up by contractors and builders to comply with contractual requirement when undertaking a project. The standard CAR policy is structured with terms and conditions including a few Exclusions.
The cessation of work (CSW) exclusion is quite an interesting wording to explore and deliberate. CSW exclusion may refer to abandonment, total or partial cessation of work. In some, the exclusion applies from the time of cessation, and in others exclusion applies after a specified period of cessation.
Sample policy wordings from a few countries were studied and analysed further.
Most Insurers in Malaysia, Singapore and India follow the Munich Re policy wording format with the following General Exclusion:
“The Insurer will not indemnify … loss, damage or liability directly or indirectly caused by or arising out of or aggravated by:
- (a) war, invasion …..
- (b) nuclear reaction……….or radioactive contamination
- (c) wilful act or wilful negligence ……….
- (d) cessation of work total or partial.”
We then considered Exclusion (d) above which, as it were, suspends policy coverage, during cessation of work whether total or partial. Normal premium rates are meant for regular situations where policyholders take reasonable precautions to protect insured property. Through this exclusion Insurers perhaps try to keep the premium affordable by eliminating disproportionately higher risk exposures from policy-holders who may choose to leave insured property abandoned and unprotected. Abandoned projects require closer scrutiny and special terms (e.g. Silent risk cover).
To mitigate the draconian effects of such exclusion, some policy wording continue coverage for a specified period of CSW. Some Insurers use CSW Extension clause to restore coverage for a specified period of CSW. We have sighted the following CSW Extension clause in Singapore:
Cessation of Cover Extension Clause
“Notwithstanding anything stated in the Policy to the contrary, cover under the Policy shall not be suspended in the event of stoppage of work by the Contractor on the contract site from any cause for a period not exceeding 30 days. In the event of partial or total cessation of work, the Insured shall use diligence and do all things reasonably practicable to protect the insured property.”
Hence, if site work is stopped for more than 30 days, insurance coverage under CAR covers stands suspended. Depending on project contractual terms, we observed the “non-suspension period” increased from 30 days to 60 days, 90 days or even more. CSW Extension clause fully restores policy coverage for the specified number of days. Thereafter, CAR policy coverage is totally suspended. Beyond that period, project stake-holders need to arrange standard annual policies to protect their interests.
We also noted similar extensions given for the CSW element in the Malaysian market, especially for the broker handled accounts.
Meanwhile, the relevant exclusion in “Contract Works and Legal Liability Policy” wording used in Australia reads as under:
8. Cessation of work
“The Company shall not be liable
for: …loss or damage due to abandonment of the Contract Works, or to cessation of work for any other reason, except for the first thirty (30) days of any such cessation.”
As part of this study, we also approached the African continent where we have come across the following CSW Extension clause wording used in CAR policy issued in Nigeria. The wording reads as follows:
MEMO 3: CESSATION OF WORK CLAUSE (MAXIMUM PERIOD 60 DAYS)
“Notwithstanding the conditions, provisions and other endorsements, it is understood and agreed that the Insurers shall be liable to indemnify the Insured during cessation not exceeding 60 days of work for any loss or damage to the insured property as follows:
- If work suspended – cover reduces to fire Peril & Theft only subject to provision by the insured of adequate Day and Night Security
- If work abandoned – cover ceases”
It is to be noticed that Singapore CSW Extension clause restores policy coverage without seeking to differentiate between cessation
and abandonment. However, the Nigeria CSW Extension wording grants only Fire and Theft cover during suspension and NO COVER whatsoever during abandonment.
Insurers are not likely to grant the extension on their own accord. Hence, CSW Extension clause is to be specifically requested. It is necessary for interested parties i.e. contractors, principals, developers, consultants, insurance intermediaries etc to include request for CSW Extension and ensure its inclusion in the policy schedule.
If the CSW Extension is requested
mid-term, Insurers may seek explanations, impose additional premium and impose conditions and/or higher excess or even refuse.
On a typical project site, cessation of work may arise due to a variety of reasons e.g. labour disturbances, delay in deliveries, financial issues or other technical or social causes.
It would be interesting to see how this Cessation of Work wording is applied in different regions and countries in relation to the on-going Covid-19 pandemic and the Government mandated lock-down where physical site activities have been stopped for months.