C.A.R. this stands for Contractors All Risk, and includes guarantee/surety facilities as well.
There are broadly two types of construction risks insurance. The first covers damage to property, such as damage to buildings and other structures being constructed or to the existing building in which the construction is being carried out. The second covers liability for third party claims for injury and death or damage to third party property. Modern forms of contractors' all risks policies cover both.
The basic principle is that contractors' all risks insurance covers those losses not covered by an 'excluded peril'. For example, the JCT contracts exclude from cover risks such as defects due to 'wear and tear, obsolescence, deterioration, rust and mildew, loss and damage arising out of war and for faulty workmanship and faulty design'. The benefit to the insured under this type of policy is that the burden is shifted to the insurer who, to resist the claim, is required to show that the cause of the loss falls within an exclusion. This insurance is usually taken out in the joint names of the contractor and the employer. Other interested parties, such as funders, often ask to be added as a joint name. The theory is that if damage occurs to the insured property then, regardless of fault, insurance funds will be available to allow for reinstatement. The effect of joint names insurance is that each party has its own rights under the policy and can therefore claim against the insurer. Each insured should comply with the duties of disclosure and notification.
When tenders are submitted, they are usually accompanied by Bid/Tender Bonds. The purpose of the Bond is to compensate the employer for costs incurred in the event that the company, which is successful in being awarded the tender, does not or cannot take up the contract.
The need to put up a Bid/Tender Bond has the added advantage of creating incentives for responsible bidding/tendering and therefore contributes to eliminating abnormally low Bids/Tenders.
Advance Payment Guarantee/Bond
Some contracts make provision for Employers/Principals to pre-finance a contractor by making payments before commencement of the contract. The Employer/Principal secures such a risk by requiring an advance payment guarantee/bond in return. Usually, the guaranteed amount will decrease in accordance with the percentage of the work certified. The guarantee/bond will be equal to the pre-financed amount – usually 30%.
This is probably the most common form of guarantee, which protects the Employer/Principal against the risk of the contractor failing to comply with the conditions of the contract. Traditionally, the guarantee amount is equal to 10% of the contract sum. However, recently the new format JBCC ‘fixed’ (7.5%) guarantee or ‘variable’ (12.5% reducing to 2%) guarantee was introduced, of which the latter version includes a Retention money element.
These bonds effectively replace the actual retention fund. Most contracts make an allowance for the Employer/Principal to retain a percentage of the funds payable to the contractor during the construction period as a form of security against default or defective work. A portion of the funds retained is paid out at the end of the construction period and the balance at the end of the maintenance (defects liability) period. It has been shown that funds that are released with a guarantee/bond significantly enhance working capital.
Guarantee/Bond for Temporary Import
Temporary import of plant and machinery for contracts in foreign countries, usually neighbouring states.