On a larger project, the CAR (contractors' all risks) policy rarely names just one company: the developer, the main contractor and – by name or by general description – the subcontractors are all insureds. In the property damage section (Section I) this works well, but in the liability section (Section II) the same structure hides a trap. Section II applies to damage caused to third parties – and the insureds named on the policy are not third parties in relation to each other. When a subcontractor wrecks the main contractor's site container office or machinery, or the developer's existing equipment, this is often where the claim gets stuck. The cross-liability clause is meant for exactly this situation – but not for everything people expect of it. As a broker, I see that many of the disputes over settling accounts with subcontractors stem from misunderstanding this clause, so here I describe how it works.
- The liability section (Section II) of CAR applies to damage caused to third parties; the insureds named on the policy are not third parties in relation to each other, so without the clause damage they cause each other is typically excluded.
- With the cross-liability clause, the cover applies to the insureds as if each of them had been issued a separate liability policy – liability claims for damage they cause each other can be assessed, but the limit remains shared.
- Even the clause does not cover damage to property insured or insurable under Section I – the works themselves – or injury to the insureds' employees; these are matters for the property damage section and for employer's liability insurance respectively.
Who is a third party on a policy with several insureds?
Under Section 6:470 of the Hungarian Civil Code (Ptk.), the purpose of liability insurance is for the insurer to relieve the insured of paying compensation for damage that the insured is obliged to pay by law. Section II of CAR narrows this down to the project: it covers bodily injury and property damage caused to third parties in connection with the construction and erection work, on the site or in its immediate vicinity – the cracked neighbouring wall, the severed utility line, the injured passer-by, as I described in the article on the liability section. Hungarian policy conditions typically follow the international, Munich Re-based model wording, and as a rule exclude from Section II damage to property owned by, in the custody of or under the control of the insureds – the contractor, the developer and other companies connected with the project – as well as injury to the employees of these companies. The logic is simple: whoever is insured on the policy is not an outsider, and their own property is a matter for Section I.
In practice, this means that if the developer, the main contractor and the subcontractors are named on the policy together (how this is done is covered in the article on the subcontractor chain), damage they cause each other is not paid under Section II without the clause, because under the policy conditions there is no third party. The wording differs from insurer to insurer; the result is the same.
What does the cross-liability clause do?
In essence, the cross-liability clause (endorsement 002 in the international model wording) comes down to a single sentence: the Section II cover applies to the insureds named on the policy as if each of them had been issued a separate liability insurance policy. As a result, the main contractor becomes a third party in relation to the developer, and the subcontractor in relation to the main contractor: if an employee of the mechanical services subcontractor wrecks equipment in the developer's plant that is not part of the project, the claim can be assessed under Section II. Hungarian insurers typically provide this as an extension that has to be requested separately, by individual agreement – UNIQA's product page, for example, lists cross-liability cover alongside the maintenance period and surrounding property extensions – so it has to be requested, and it has to be visible on the policy.
Two mechanical details determine the settlement. The first: the clause does not multiply the limit. Under the model wording, the insurer's total liability towards the insureds for any one loss event may not, even in aggregate, exceed the liability limit stated in the policy; if both the developer and the main contractor suffer damage from the same event, they share the common limit. The second: the clause remains liability cover, which means the insurer pays if the insured who caused the damage owes compensation under Hungarian law. Contractual penalties agreed in the contract, extra costs due to delay and the remedying of defective performance are not compensation for damage but contractual obligations – these are not brought in by the clause either. Contracts under the FIDIC Red and Yellow Books expressly require third-party liability insurance to extend to the relationship between the parties themselves – I wrote about this in the article on FIDIC projects – and in such cases the clause is not a convenient extra but a contractual requirement.
What stays outside even with the clause: the works themselves and the parties' own employees
The clause expressly removes two things from its scope, and these two points cause the most disappointment. The first: damage to property insured or insurable under Section I – according to the model wording, even if in the end it is not paid from there because of the deductible or a limit. So if the subcontractor damages the main contractor's already completed floor slab, the installed building services or the site accommodation container, that is not cross-liability damage but property damage: Section I pays for it, subject to the deductible and its own conditions. This also leads to a little-known grey zone: in most policies the developer's existing building can be insured under Section I with a separate extension (“existing property”, “surrounding property”), so under several sets of policy conditions it counts as insurable property – which means that cross-liability does not open Section II for it either. The clean solution here is the existing property extension, not the liability side; how a given insurer's policy conditions treat this can only be established from the wording.
The second exception: injury to the insureds' employees, or more precisely to those who can be insured under employer's liability insurance. If an employee of the main contractor is injured by material falling from the subcontractor's scaffolding, the injured person brings a claim against their own employer under the Labour Code, the claim is handled by employer's liability insurance, and any recovery questions between the two companies are no longer decided within CAR. The liability section of CAR leaves the employees of the project participants outside cover, with or without the clause. Finally, there is the deductible: the Section II deductible also applies to cross-liability claims, and it is borne by the insured who caused the damage – unless the construction contract provides otherwise.
Settling up with subcontractors in practice: who pays whom?
Five typical situations according to the logic of the policy – the details depend on the policy conditions and the clauses:
- The subcontractor damages a completed part of the works. Property damage: Section I pays for it, subject to the deductible. Whether the deductible is borne by the subcontractor who caused the damage or by the main contractor is a matter for the construction contract; the insurer typically does not pursue a recovery claim against the insureds, except where the damage was caused intentionally or through gross negligence – this too depends on the policy conditions.
- The subcontractor wrecks the main contractor's machinery or site container office. If these are insured under Section I (with a construction plant and machinery clause or a temporary structures clause), they are paid from there; if not, they can be paid from Section II only with a cross-liability clause, and only if the policy conditions do not classify them as property insurable under Section I.
- The subcontractor damages the developer's existing property that is not part of the project. This is primarily a question for the existing property extension; with cross-liability, Section II may come into play if the policy conditions do not exclude it – a point to clarify before the policy is taken out.
- An employee of one insured is injured through the fault of another. Employer's liability insurance, not CAR – the clause does not change this.
- The subcontractor damages the neighbouring building or injures a passer-by. A classic Section II claim: the insurer pays the injured party, regardless of which insured caused it, out of the shared limit.
And what if the subcontractor is not on the policy? Then, from the policy's point of view, it is an outsider: damage it causes to the works is paid by Section I, and the insurer may, under the policy conditions, turn to it with a recovery claim; for the damage it causes to the main contractor's property, its own contractor's liability insurance – compulsory since 2025 – may provide cover, according to its conditions and limit, and towards the client it is the main contractor who answers for it, as I described in the article on damage caused by subcontractors. In both cases the construction contract and the policy must say the same thing.
What should you do now?
Get out your policy and check three things: who is named as an insured; whether there is a cross-liability clause and what its exact wording is – in particular, what it removes from its scope; and whether the liability limit is shared, and whether it is sufficient given the number of parties involved in the project. In the subcontracts, settle who bears the deductible and how the insureds settle damage they cause each other – the policy does not decide this for you. For injury to your own employees, look at separate employer's liability insurance, and for the developer's existing property, at the existing property extension, not the liability section. With a FIDIC-based or foreign client, cross-liability is a contractual expectation, so write it into your request for quotations from the outset. If you let me know before the policy is taken out or the subcontract is signed, I prepare the comparison of the quotes and the paperwork.
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Sources
- Hungarian Civil Code (Ptk., Act V of 2013) Section 6:470 – content of the liability insurance contract
- UNIQA Biztosító: Építés-szerelés biztosítás (C.A.R.) product page (construction and erection insurance) – extensions available on request, including cross-liability cover (by individual agreement)
- Alfa Vienna Insurance Group Biztosító: Építés–Szerelés biztosítás (C.A.R. II.) general terms and conditions (construction and erection insurance), CARII-SZ-230801 (in force from 1 August 2023) – the section structure of CAR and its list of clauses
- Munich Re-based standard Contractors' All Risks model wording (Zurich General Insurance Malaysia: Contractors' All Risks policy wording) – special exclusions of Section II: property covered or coverable under Section I, injury to employees of the contractor, the principal and other companies connected with the project and damage to property in their custody, liability assumed under contract (the document does not contain the text of cross-liability clause 002)
- Government Decree 191/2009 (IX. 15.) on construction activities, Sections 21/B–21/G – the contractor's compulsory liability insurance (from 15 January 2025)
