A building under construction can be exposed to fire, storms, accidental collapse, machinery damage and third-party incidents before the owner ever takes possession.

The difficulty is that construction projects involve several parties, owners, contractors, subcontractors, consultants and lenders. Insurance therefore needs to be coordinated with the contract rather than arranged as an afterthought.

What Is Construction Insurance?

Construction insurance can provide protection for specified physical damage and liabilities arising during a construction project.

Depending on the project and policy structure, cover may involve:

• Contract works
• Construction materials
• Temporary works
• Plant and machinery
• Third-party liability
• Debris removal
• Testing or commissioning
• Other project-specific risks

Simplified definition: Construction insurance can protect the project while it is being built, before the completed asset is transferred into normal operational use.

Think About the Project in Four Stages

Stage 1: Material arrives on site

Ask:

• When does insurance responsibility begin?
• Is material in transit covered separately?
• What about material stored outside the main site?

Stage 2: Construction begins

Review exposure to:

• Fire
• Flood
• Accidental physical damage
• Collapse
• Theft, subject to policy conditions
• Damage caused during construction activity

Stage 3: Testing and commissioning

For mechanical, electrical or industrial projects, testing may introduce different risks from ordinary construction.

Check whether:

• Testing is included
• The testing period is sufficient
• Machinery failure during testing is addressed
• Special conditions apply

Stage 4: Handover

Clearly identify when construction cover ends and operational property insurance should begin.

Gaps can arise if one policy ends before another begins.

Who Should Be Named in the Policy?

Depending on the contract, relevant insured parties may include:

• Project owner
• Main contractor
• Subcontractors
• Other stakeholders where appropriate

This should be coordinated with contractual insurance requirements.

For complex construction contracts, obtain qualified legal advice on liability allocation rather than relying solely on the insurance wording.

Illustrative Policy Wording

The following is fictional:

“The policy may indemnify insured parties for accidental physical loss of or damage to the contract works during the insured construction period, subject to the scope, exclusions and conditions stated in the schedule.”

This is illustrative wording only.

Check:

• Insured parties
• Project value
• Site location
• Construction period
• Testing period
• Third-party liability
• Deductibles
• Handover provisions

Example, Damage Before Completion

Suppose a project has a contract value of ₹20 crore.

During construction, a storm damages:

• Partially completed structure: ₹60 lakh
• Materials awaiting installation: ₹20 lakh
• Temporary works: ₹10 lakh

Total reported loss: ₹90 lakh

After assessment:

• Eligible insured damage: ₹82 lakh
• Costs outside cover: ₹8 lakh

The claim may be considered on ₹82 lakh, less the applicable deductible and subject to other conditions.

Actual treatment depends on the policy and contract.

The Practical Takeaway

Construction insurance should follow the project from material movement through construction, testing and final handover.

Before work begins, align the insurance with the construction contract, project value, timeline and responsibilities of each party. Revisit the cover if the project cost or completion date changes materially.

Coverage, exclusions, limits and claim requirements vary by insurer and policy. Read the customer information sheet and complete policy wording before buying or renewing.