Why Your CAR Policy Extension Costs More Than the Original Premium

How a contractors all risk premium is actually built in India, why insurers discount the IIB rate to nothing, the two situations that bring that discount back on an endorsement, and how to structure the policy period so an extension never catches you.

A contractor buys a contractors all risk policy for a one year project, pays a premium that feels pleasantly small, and gets on with building. Eighteen months later the project is running late, the policy needs extending by six months, and the quote for that extension arrives at a number that looks absurd next to what the original year cost. The contractor assumes something has gone wrong, or that someone is taking advantage. Usually neither is true. The extension is expensive because of how the original premium was built, and almost nobody explains that at the point of sale.

First, the two products

Contractors all risk, usually shortened to CAR, covers civil construction works while they are being built: the structure itself, materials on site, and third party liability arising from the work. Erection all risk, or EAR, is the same idea for plant and machinery being erected and tested, so a factory line, a turbine, a transmission project. The premium mechanics described here apply to both.

The five things your premium is made of

A CAR or EAR premium is not a single rate. It is five separate rates applied to the sum insured and then added together. Knowing which of the five is actually doing the work is the whole point of this article.

• The IIB rate. IIB is the Insurance Information Bureau of India, the industry body that collects loss data. The base rate it publishes is fixed by IRDAI and varies by occupancy, meaning the type of project you are building. This is the largest of the five rates on paper.
• The EQ rate, for earthquake. It depends on which seismic zone the site sits in, so the same project costs differently in Jaipur and in Chennai.
• The STFI rate. STFI stands for storm, tempest, flood and inundation, the natural catastrophe perils other than earthquake. Also location driven.
• The terrorism rate, charged only if you opt for terrorism cover. Many projects do not.
• Add ons, the optional extensions such as cover for owners surrounding property, debris removal limits, escalation or extended maintenance. Here the sum insured matters: below Rs 10 crore these are separately chargeable, and at or above Rs 10 crore they are generally built into the cover rather than priced line by line.

The mechanic nobody mentions: the IIB rate gets discounted to zero

In practice, insurers competing for engineering business commonly apply a 100 percent discount on the IIB rate. Not a trim, the whole thing. This is a commercial decision taken by the insurer to win the account in a competitive market, and it is normal practice across the market rather than one insurer behaving oddly. It is also, and this is the part that matters later, not something the customer is contractually entitled to. It is a discretionary discount granted at the time of quoting.

Follow the arithmetic through. If the IIB rate is discounted entirely, and the project is at or above Rs 10 crore so the add ons are already included, and no terrorism cover has been opted for, then exactly two rates are left deciding your premium: the earthquake rate and the STFI rate. A premium that looks like it was priced on the size and nature of your project was, in reality, priced almost entirely on where the site is and what the weather and the ground do there.

A worked example

The numbers below are illustrative only. They vary by location, occupancy, insurer and the state of the market on the day, and they are not a quotable market rate. Take them as a demonstration of the gap, not as a price.

• The project: a Rs 10 crore civil construction job in Jaipur, policy period one year, no terrorism cover.
• At full published IRDAI rates, with no discount applied anywhere: roughly Rs 7,00,183 including 18 percent GST.
• With the IIB discount insurers actually apply in the market: roughly Rs 53,100 including GST.

There is something counterintuitive worth naming honestly here. Rs 7 lakh to insure a Rs 10 crore construction project does not, on its own, sound like an outrageous number. It sounds roughly reasonable. It only becomes startling once you see that the figure actually charged is closer to Rs 53,000, which is a fraction over seven percent of it. The contractor who paid Rs 53,000 has no reason to think anything unusual happened, because the premium was never presented as a discount off anything. It was presented as the price.

When the discount comes back

A discount granted at inception is granted for that risk, on that day, on those facts. When you come back mid policy and ask for an endorsement, the insurer reprices, and two situations in particular will see that endorsement issued at a reduced discount or at none at all.

• A claim has already been lodged and the loss ratio on the policy has moved, and you now need either an increase in sum insured or an extension of the period. The insurer is no longer pricing a clean risk, and the discretionary discount is the first thing to go.
• The total period, meaning the project period plus the extended maintenance period, crosses 84 months. Past that point the insurer cannot decide the discount on its own. It depends on the reinsurer, under the terms of the treaty, which is the standing agreement that governs what the insurer may accept and on what terms without going back to ask.

It is worth being clear about what this is and is not. The discount was never contractually owed to you. Nothing in the policy promised it would be repeated on future endorsements. So an insurer pricing an extension at a lower discount is not breaching anything and is not behaving badly. It is the structure working exactly as designed. That single fact is the thing most contractors do not know at the point they buy, and it is the thing that turns a routine extension into an unbudgeted shock.

And you cannot take it to another insurer

The obvious response to an expensive extension quote is to get a competing one. For a project already under construction, that option mostly does not exist. Insurers generally do not take on a project mid term, because they would be underwriting a risk whose first half they never saw, inspected or priced. Once a project has been underwritten by one insurer, in practice only that insurer can offer the extension, and only within what their own reinsurance treaty permits.

So the contractor facing a high extension price is not choosing between insurer A and insurer B. The real choice is covered or uncovered, on a site that is still being built and still carrying every exposure the policy was bought for in the first place. This is a structural feature of how engineering risk is placed, not evidence of anything underhand. It is simply something you want to understand before you buy, not after.

How to structure it so this never bites you

All of the above is avoidable, and the fix costs almost nothing if it is done at the right moment. It has two parts, and both belong at original issuance rather than later.

• Build the delay in at the start. If you know, as most contractors do, that a stated eighteen month programme realistically runs to twenty four, buy the policy for the realistic period rather than the optimistic one. Period written into the original policy is priced under the discount you negotiated. Period added later is priced under whatever the insurer feels like at that point.
• Keep the extended maintenance period at a maximum of 24 months. EMP is the tail of cover that runs after the works are handed over, during which the contractor is still responsible for defects and for making good.

The reason for the 24 month cap is arithmetic. The ceiling that matters is the 84 month total, beyond which the discount stops being the insurer’s decision and becomes the reinsurer’s. Project period plus EMP has to stay under that total. Cap the EMP at 24 months and you leave yourself 60 months of project period, because 60 plus 24 is 84. That is five full years of construction time available to you, with a two year maintenance tail, all inside the window where your insurer can still extend you on their own authority and at their own discretion. Let the EMP run to 36 months instead and your project period headroom drops to 48, which on a large infrastructure job is not nearly as much room as it sounds.

What to ask before you sign

• What discount has been applied to the IIB rate on this quote, and is it recorded anywhere in the policy?
• What would an extension of six months cost today, at current loss ratio, so there is a reference point on file?
• What is the total of project period plus EMP as currently written, and how far is that from 84 months?
• If a claim is lodged in year one, what happens to the pricing of any endorsement after it?
• Is terrorism cover included, and if not, is that a decision someone actually took or just the default?

RiskPe places and reviews engineering covers for contractors and project owners: see contractors all risk and erection all risk insurance. If the contract also requires performance or advance payment security, read about surety bonds, which free up the bank limits a bank guarantee would otherwise lock away.