Insurance is a core element of every construction project in the UAE. A well-structured insurance programme protects employers, contractors, consultants and financiers from the significant risks that arise during construction. Yet the drafting and interpretation of these provisions often remains one of the most misunderstood parts of a contract.
This article provides an overview of the key types of construction insurance in the UAE, essential contractual provisions that parties should be aware of, and practical considerations for ensuring adequate protection throughout the project lifecycle.
Types of Construction Insurance
Construction projects in the UAE typically require several types of insurance coverage. The specific requirements depend on the nature and scale of the project, but the most common forms include:
Contractor's All Risks Insurance: Protecting the Works
Contractor's All Risks (CAR) insurance provides coverage against physical damage to the works, including materials on site and in transit. This is typically the primary insurance policy on any construction project.
CAR policies generally cover the full reinstatement value of the works, together with an allowance for professional fees and other ancillary costs incurred in the event of damage. The policy usually remains in place until the works are taken over by the employer, at which point responsibility for insuring the completed works passes to the employer.
Defects themselves are typically excluded from CAR coverage. This is a common source of disputes. In UAE practice, employers often mistakenly assume that CAR policies cover defective workmanship itself. They do not. CAR responds only to resultant damage, not the defect, unless extended cover is purchased. For this extended coverage to be effective, the different components of the works must be clearly delineated in the policy.
As contractors often maintain global CAR policies covering all their projects, it is generally more cost-effective for contractors to procure this insurance rather than employers taking out project-specific policies. However, where contractors rely on global CAR policies, employers should confirm that aggregate limits are not eroded by claims from other projects.
Professional Indemnity Insurance: Covering Design Liability
Professional Indemnity (PI) insurance provides coverage for contractors with design responsibility, protecting against liability arising from professional negligence. This insurance is essential for design-build contracts where the contractor assumes responsibility for the design of the works.
PI insurance operates on a "claims made" basis. This means coverage responds when a claim is made against the insured, rather than when the breach of professional duty actually occurred. As a result, PI insurance should remain in place for the duration of any potential limitation period. Under UAE law, this is typically 10 years from the date of project completion, aligning with the decennial liability period under Articles 880-883 of the UAE Civil Code.
PI policies commonly exclude coverage for "fitness for purpose" warranties. Parties should carefully review policy terms to understand exclusions that may limit coverage. UAE design-build contractors often outsource design to sub-consultants, so the contract should address whether sub-consultant PI coverage is required and at what level.
Public Liability Insurance: Protecting Against Third-Party Claims
Public Liability insurance provides coverage for third-party claims arising from death, personal injury, or property damage occurring during construction activities. This insurance covers claims from members of the public and other third parties who are not employees of the contractor.
Do not confuse public liability insurance with contractor's all risks insurance. Public liability covers third parties. CAR covers the works. Both are typically required on construction projects.
Workers' Compensation Insurance: Mandatory Employee Protection
Workers' Compensation insurance provides coverage for the death or personal injury of the contractor's employees while performing the works. This insurance is mandatory under UAE labour law for all employers.
Under Sharia law principles applied in the UAE, "diyah" (blood money) may be claimed by the heirs of a victim if an employee of the contractor causes the death of a third party. Diyah is regulated under Federal Decree-Law No. 31/2021. The standard rate in the UAE is AED 200,000, though this can vary by judicial discretion in certain emirates. Contractors may wish to procure additional insurance coverage against this potential liability.
Decennial Liability Insurance: The 10-Year Structural Guarantee
Under Articles 880 to 883 of the UAE Civil Code, contractors and supervising architects or engineers are jointly liable to the employer for a period of 10 years from the date the works are taken over for any defect that threatens the safety or stability of the building, or if the building suffers total or partial collapse.
This is strict liability. No proof of negligence is required.
Decennial liability is a mandatory provision under UAE law and cannot be contractually excluded or limited. Parties cannot agree to a shorter liability period, and any contractual provision purporting to exclude or limit this liability will be void under Article 882 of the Civil Code.
Given the strict nature of decennial liability, contractors and design consultants often procure specific decennial liability insurance. While such insurance was previously optional, the UAE Insurance Authority has signalled its intention to make decennial liability insurance mandatory. Parties should monitor regulatory developments in this area.
Delay in Start-Up Insurance: Protecting Against Late Completion Losses
Delay in Start-Up (DSU) insurance, also known as Advanced Loss of Profits (ALOP) insurance, provides coverage to employers for losses arising from late completion of the works. This may include loss of revenue, increased financing costs, and other consequential losses.
While contractors are typically liable for liquidated damages in the event of delay, such damages are customarily capped at 10% of the contract price. Where the employer's actual losses exceed this cap, DSU insurance provides additional protection. This form of insurance is particularly important for project-financed developments where delays can have significant financial consequences for lenders and investors.
Key Contractual Provisions
Beyond the basic requirement to procure and maintain adequate insurance, construction contracts should address several important ancillary issues.
Joint Names Insurance
Certain insurance policies, particularly CAR and public liability insurance, should be taken out in the joint names of the employer, contractor, and (where relevant) any project lenders. This ensures that all parties with an insurable interest in the project are protected under the policy.
A party named on an insurance policy has the right to make claims directly under that policy. It is also common for insurers to waive their rights of subrogation against co-insured parties. This prevents the insurer from seeking to recover against another insured party, even if that party's actions contributed to the loss.
Where multiple parties are insured under the same policy, the policy should provide that no act or omission of one co-insured party (such as misrepresentation or failure to notify) will prejudice the coverage of other co-insured parties.
Cross Liability Clauses
Policies taken out in joint names should contain a cross liability clause. This provision ensures that each party is treated as if a separate policy had been issued to them, allowing the policy to respond to liability incurred by one co-insured party to another.
Interest Noted vs Joint Names: An Important Distinction
Parties should understand the distinction between having their interest "noted" on a policy and being named as a joint insured. While a party whose interest is noted may have a right to share in insurance proceeds, they typically have no direct right to make a claim under the policy. Furthermore, insurers will generally not waive their subrogation rights against a party whose interest is merely noted.
Per Occurrence vs Aggregate Limits
Insurance coverage may be provided on either a "per occurrence" or "aggregate" basis. Per occurrence coverage provides a separate limit for each insured event. Aggregate coverage provides a single limit for all claims during the policy period.
From the employer's perspective, per occurrence coverage is generally preferable. It ensures that a previous claim does not exhaust or reduce available coverage for subsequent events. This is particularly important where the contractor maintains a global policy covering multiple projects, as a claim on one project could affect coverage available for other projects.
Deductibles and Excesses
Employers should carefully review deductible or excess amounts under insurance policies. Excessive deductibles can effectively leave certain risks uninsured, as smaller losses will fall entirely on the insured party. The contract should specify maximum acceptable deductible levels.
Some insurers in the UAE specifically exclude "hot works" (welding, cutting, grinding) unless separately declared. Contractors should ensure all relevant activities are covered.
Policy Exclusions
All insurance policies contain exclusions that limit coverage. Common exclusions in construction insurance include:
- Defects in design, materials, or workmanship (though resulting damage may be covered)
- Wear and tear, gradual deterioration, or inherent vice
- Losses arising from delay or loss of use
- Certain types of consequential loss
- Fitness for purpose warranties (in PI policies)
Parties should review policy exclusions to ensure they understand the scope of coverage and identify any gaps that may need to be addressed through additional insurance or contractual risk allocation.
Insurance and Liability Caps: A Common Misconception
A common misconception in the construction industry is that a contractor's liability for a particular risk is implicitly capped at the amount of insurance required under the contract.
This is incorrect.
If a contractor is required to maintain PI insurance of USD 5 million per claim, the contractor's liability for a defective design is not automatically limited to USD 5 million. The employer may pursue the contractor for any losses exceeding the insurance limit, seeking recovery from the contractor's assets or any additional insurance policies the contractor may hold.
In a recent UAE dispute, a contractor argued that its PI insurance limit capped its liability. The court disagreed. Insurance and liability caps are legally separate concepts.
Express contractual wording is required to cap a contractor's liability. Even then, Article 390(2) of the UAE Civil Code may allow courts to adjust pre-agreed limitations on liability to ensure the injured party receives compensation for actual losses sustained.
Common Misconceptions About Construction Insurance
Insurance Requirements Under Dubai Law No. 7 of 2025
Dubai Law No. 7 of 2025 Regulating Contracting Activities in the Emirate of Dubai, effective from January 2026, introduces a new regulatory framework for the construction sector. While the law focuses primarily on contractor registration and classification, it has implications for insurance arrangements.
The new law emphasises compliance with health and occupational safety standards. Contractors must maintain appropriate insurance coverage as part of their registration requirements with Dubai Municipality. While the implementing regulations have not yet clarified detailed insurance thresholds, the law embodies a shift toward stricter contractor accountability and compliance monitoring in Dubai.
Parties should monitor regulatory developments and ensure their insurance programmes remain compliant with evolving requirements.
Risk Transfer at Taking Over
The issue of a Taking Over Certificate (TOC) marks a critical point in the insurance lifecycle of a construction project. Upon taking over, the risk in the works typically passes from the contractor to the employer under standard FIDIC contract forms widely used in the UAE.
This has important implications for real estate and construction disputes:
- The contractor's CAR insurance obligations will generally cease
- The employer must ensure adequate insurance coverage is in place for the completed works
- The defects liability period commences, during which the contractor remains responsible for remedying defects
- The 10-year decennial liability period begins
Some contracts delay risk transfer until formal "certification" rather than physical possession. Parties should clarify the trigger point. TOC may also prompt insurers to adjust deductibles, so employers should coordinate with their insurance advisors well in advance of anticipated taking over to ensure seamless transition of coverage. For further guidance on FIDIC contract forms and their application, parties should consult with specialist construction lawyers.
Practical Recommendations
Insurance clauses in construction contracts typically require contractors to warrant that they have satisfied all insurance obligations. A breach of these warranties can constitute a serious breach of contract.
We recommend that parties:
- Review insurance requirements carefully before executing any contract. Ensure that all insurance obligations are clearly understood and can be satisfied.
- Engage insurance advisors early in the project. Confirm that the required insurance can be obtained and understand any cost implications.
- Coordinate insurance and legal review. Ensure that insurance requirements are consistent with underlying contractual obligations.
- Obtain copies of all relevant policies. Co-insured parties should obtain and review copies of policies to understand exactly what they are covered for.
- Verify insurer creditworthiness. Ensure that insurers meet any contractual requirements regarding financial strength and credit ratings.
- Monitor policy renewals. Ensure that coverage remains in place throughout the required period, particularly for long-tail risks such as PI and decennial liability.
- Align insurance with subcontracting strategy. Ensure that insurance obligations address nominated subcontractors and specialist suppliers, particularly where they carry design responsibility.
Conclusion
Adequate insurance coverage is essential for protecting all parties involved in construction projects in the UAE. Given the complexity of insurance provisions and the significant financial exposure at stake, parties should invest appropriate time and resources in understanding their insurance obligations and ensuring suitable coverage is in place.
The evolving regulatory landscape, including Dubai Law No. 7 of 2025 and potential mandatory decennial liability insurance requirements, means that parties must remain vigilant and adapt their insurance programmes accordingly.
How Kayrouz & Associates Can Help
Kayrouz & Associates' Construction Law team regularly advises employers, contractors, and other project stakeholders on insurance requirements in construction contracts. Our team can assist with:
- Reviewing and drafting insurance provisions in construction contracts
- Advising on compliance with UAE insurance requirements
- Coordinating with insurance brokers and advisors
- Advising on insurance claims and coverage disputes
- General construction contract drafting and review
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