What happens if CAR sum insured is only the contract value?

Standard Malaysian CAR wordings require the sum insured to be not less than the full value of the contract works at completion — inclusive of all materials, wages, freight, customs duties, dues, and materials or items supplied by the Principal, plus the replacement value of construction plant, equipment and machinery as new. A sum insured set at the bare contract price leaves out everything on that list. If a loss happens while the sum insured falls short, the wordings reduce what is recoverable in the same proportion as the shortfall, tested against every object and cost item separately.

What Memo 1 actually requires

The requirement sits in a clause usually headed Memo 1 — Sums Insured, and it appears in essentially the same form across the standard Malaysian CAR wordings reviewed for this page. It sets a floor, not a target.

“It is a requirement of this insurance that the sums insured stated in the Schedule shall not be less than: (a) the full value of the contract works at the completion of the construction, inclusive of all materials, wages, freight, customs duties, dues, and materials or items supplied by the Principal; (b) the replacement value of construction plant, equipment and construction machinery …”

Item (b) is defined precisely: the replacement value means the cost of replacing the insured plant, equipment and machinery with new items of the same kind and same capacity — not their depreciated worth, and not what they cost when bought.

The deductible does not come out of this calculation at all. It sits under the policy's Special Exclusions to Section I, as its own line — the amount the insured bears in any one occurrence, before Memo 1's proportional-reduction rule is even applied. A sum insured that is short and a deductible that applies are two separate deductions from the same claim, not one.

Why the contract price is the wrong number

The contract price — what the client is paying for the job — is not on Memo 1's list. What is on it: materials, wages, freight, customs duties, dues, and materials or items supplied by the Principal. The last one is the trap.

On a Penang building job it is common for a G5 contractor not to be buying every material on site. The Principal — the client procuring the works — supplies structural steel, sometimes fittings, direct to site or through a nominated supplier. None of that value shows up in the contract sum the contractor is paid, because the contractor never bought it. Memo 1 does not care who paid for it. It counts materials or items supplied by the Principal as part of the full value of the works, in full. A sum insured pegged to the contract price leaves that value out, and on a job like a school or institutional block, where the client commonly procures major materials directly, it can be a large share of what the works are actually worth.

Freight, customs duties and dues follow the same logic on any job bringing in imported materials — precast components, specialist plant, imported finishes. Wages are on the list too, and they move over the life of a build in a way a contract price fixed at tender does not.

PAM 2018 does not use the phrase "contract value" either, and its own formula makes the same point from the contract side rather than the policy side. Clause 20.A requires a CAR policy "for a value not less than the Contract Sum, plus the sum to cover professional fees for reinstatement and the sum to cover the removal of debris all as stated in the Appendix." Where the Appendix leaves those two lines blank, PAM 2018's own defaults apply: professional fees at ten per cent of the Contract Sum, and debris removal at not less than one per cent. So a sum insured set at the bare contract sum is short against the contract's own formula first — before Memo 1's separate list of what counts as the full value of the works is applied on top of that.

What happens at claim time when the sum insured falls short

Memo 1 states the consequence directly: if, in the event of loss or damage, it is found that the sums insured are less than the amounts required to be insured, the amount recoverable is reduced in such proportion as the sums insured bear to the amounts required to be insured — and every object and cost item is subject to this separately, not the schedule as a whole. This is the standard CAR average clause, and it appears in near-identical terms across the wordings reviewed. One insurer's product disclosure sheet puts the same point in plain language: the insured must ensure the sum insured is not less than the full value required, "otherwise, you shall have to bear a proportionate share of the loss if the insured property is valued higher than the sum insured at the time of loss."

The wordings do not go further than that. They do not set out a separate formula, table or worked example for the proportion beyond "sums insured bear to the amounts required to be insured" — and nothing here invents one. What they do say clearly is that the reduction is proportional and tested item by item, so being short on one component, such as Principal-supplied steel, does not just cost you that component. It pulls down the recovery rate on the whole claim for that item.

The deductible then comes off what is left. It applies under the Special Exclusions to Section I regardless of whether the sum insured was adequate, so a short sum insured and the deductible are two separate reductions on the same event, not alternatives to each other.

The variation trap

The value of the works is not fixed at tender either. Variation orders raise it mid-contract, and Memo 1 addresses that — but not automatically. The insured "undertakes to increase or decrease the amounts of insurance in the event of any material fluctuation in wages or prices provided always that such increase or decrease shall take effect only after the same has been recorded on the Policy by the Insurers."

That is the sting in it. Notifying the insurer is on the contractor, and the higher figure only protects the contractor once the insurer has actually recorded it on the policy. Silence does not raise the sum insured on its own — it just leaves the gap sitting there until a loss finds it.

Take a variation order that adds two additional floors partway through a build. The full value of the completed works goes up — more materials, more wages, a bigger structure to replace if something goes wrong. If nobody goes back to the insurer to record the increase, the schedule still shows the sum insured for the original scope while the site now holds a larger one. A loss after that point is tested against a sum insured that was right for the old contract and short for the one actually being built — and it is a short sum insured in exactly the sense Memo 1 already deducts for, not a separate problem.

This is a close cousin of a policy that simply does not match the contract at all — see what to do when the policy doesn't match the contract for the wider version of that gap. Getting the schedule right in the first place starts before the contract is even signed — see what a contractor needs before tendering.

Frequently asked

What does "full value of the contract works at completion" mean under a CAR policy?

Standard Malaysian CAR wordings define it under Memo 1 — Sums Insured: the sum insured must not be less than the full value of the contract works at the completion of construction, inclusive of all materials, wages, freight, customs duties, dues, and materials or items supplied by the Principal, plus the replacement value of construction plant, equipment and construction machinery as new, of the same kind and capacity. It is the value of the finished works, not the contract price at signing and not the value of work done so far.

Does the CAR sum insured need to include materials supplied by the Principal?

Yes. Memo 1 names materials or items supplied by the Principal as part of the full value the sum insured has to reach. Where the contract has the Principal supplying materials such as structural steel or fittings direct to site, that value still has to be counted in the sum insured even though the contractor never paid for it — leaving it out understates the required figure, not just the contract price.

What happens if the CAR sum insured turns out to be too low when a claim happens?

Standard Malaysian CAR wordings state that if, at the time of loss, the sums insured are found to be less than the amounts required to be insured, the amount recoverable is reduced in the same proportion as the sums insured bear to the amounts required to be insured, with every object and cost item tested separately. This proportional reduction applies on top of, not instead of, the policy deductible, which sits under a separate exclusion and is borne by the insured regardless of whether the sum insured was adequate.

If a variation order increases the contract works, does the CAR sum insured update automatically?

No. Standard CAR wordings require the insured to increase the sum insured for material fluctuation in wages or prices, but the increase only takes effect once it has been recorded on the policy by the insurer. A variation order that grows the works does not pull the sum insured up on its own — someone has to go back to the insurer and get the higher figure endorsed before it counts, or the schedule keeps testing the original, smaller scope against a claim on the bigger one.

Memo 1 — Sums Insured is described here as it appears, in essentially identical form, across the standard Malaysian CAR wordings reviewed for this page; exact wording and any special conditions vary by insurer, so always check your own policy schedule and wording. Where PAM 2018 figures are cited they are the contract's own defaults, applying only where the contract Appendix is left blank — the figures in your own contract govern. This page is general information, not advice on a specific policy or contract.