Construction Insurance in Turkey: Contractor, Investor and Project Risk Protection

Introduction

Construction projects combine some of the largest financial risks in the real estate and infrastructure sectors.

A single project may be exposed to fire, flooding, collapse, defective workmanship, damage to neighbouring buildings, employee accidents, design errors, theft of equipment, contractor insolvency, natural disasters and delays affecting the commercial viability of the investment.

For this reason, construction insurance should not be viewed merely as an administrative document obtained at the beginning of a project.

It is part of the project’s overall risk-allocation architecture.

In Turkey, there is no single insurance policy that automatically protects the developer, contractor, investor, landowner, workers, purchasers and third parties against every construction risk.

Different policies address different risks.

The most important instruments may include:

• Construction All Risks insurance;
• third-party liability insurance;
• employer’s liability insurance;
• professional indemnity insurance;
• building completion insurance;
• surety insurance;
• machinery and equipment insurance;
• earthquake-related coverage; and
• project-specific contractual insurance arrangements.

The appropriate insurance structure depends on the nature of the project, contractual allocation of risk, financing model, identity of the parties and whether the project is subject to special legislation such as public procurement, pre-paid housing or urban transformation rules.

The key legal principle is therefore simple:

An insured construction project is not necessarily a fully protected construction project.

The wording, limits, insured parties, exclusions, deductibles, policy period and extensions must all be examined before determining what risk has actually been transferred to the insurer.

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1. What Is Construction All Risks Insurance in Turkey?

The principal property-damage insurance used during construction is generally referred to as Construction All Risks insurance — CAR, or İnşaat Sigortası (Bütün Riskler).

The applicable General Conditions published by the Turkish Insurance and Private Pension Regulation and Supervision Agency, SEDDK, provide that the insurance covers insured property at the construction site against sudden and unforeseen physical loss or damage occurring during the insurance period, except for risks specifically excluded by the policy.

This is an important concept.

“All Risks” does not mean:

“Every possible construction-related loss is insured.”

It generally means that unforeseen and sudden physical damage is insured unless excluded by the General Conditions, special conditions or policy endorsements.

Therefore, every Construction All Risks policy must be reviewed together with its exclusions and extensions.

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2. What Can a CAR Policy Protect?

The principal insured property is normally the construction work itself.

Depending on the project and policy structure, this may include:

• permanent construction works;
• construction materials incorporated into the project;
• labour and related construction costs;
• certain equipment;
• temporary structures;
• site facilities;
• construction machinery;
• debris-removal expenses; and
• certain additional costs following insured damage.

Under the SEDDK Construction All Risks General Conditions, the insured amount should generally correspond to the final value the project is expected to reach at completion, including relevant construction-related costs. Where project values increase, the insured must notify the insurer and obtain the necessary adjustment so that the increased value remains properly insured.

This issue is particularly significant in long-term Turkish construction projects affected by:

• inflation;
• currency fluctuations;
• increases in labour costs;
• material-price increases; and
• changes in the contract price.

A policy issued for an outdated project value may expose the insured to underinsurance.

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3. Underinsurance Can Substantially Reduce the Compensation Paid

An investor should never assume that the existence of a policy means that the entire loss will be reimbursed.

The SEDDK General Conditions expressly provide for the consequences of underinsurance.

Where the insured amount is lower than the value required under the policy conditions, the insurer may be responsible only proportionally for the loss.

For example:

A construction project is insured for TRY 500 million.

Because of inflation and project increases, its proper insurable value later becomes TRY 1 billion.

A major covered loss of TRY 200 million occurs.

The fact that the physical loss is below the TRY 500 million headline policy amount does not necessarily mean that TRY 200 million will automatically be paid.

The underinsurance provisions may materially reduce the recoverable amount.

For project owners, lenders and investors, continuous monitoring of the insured value is therefore critical.

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4. Construction Machinery Is Not Automatically Covered in Every Policy

Another common mistake is assuming that cranes, excavators, generators and other machinery are automatically part of the standard project coverage.

The SEDDK General Conditions identify construction machinery and equipment as items that may be included through additional agreement and appropriate policy limits. Temporary site buildings, facilities and certain site equipment may likewise require specific inclusion.

Therefore, the policy schedule should specifically answer:

Are contractor’s plant and machinery insured?

If so:

At what value?

The investor should also examine whether particular machinery should instead or additionally be protected under machinery-breakdown or other specialist insurance.

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5. Third-Party Liability Requires Special Attention

Construction projects create substantial risks to persons who are not parties to the construction contract.

Excavation may damage a neighbouring building.

A crane may damage a vehicle.

Construction materials may fall onto adjacent property.

Vibration may damage neighbouring foundations.

An accident may injure a visitor.

The standard Construction All Risks framework identifies legal liability for damage suffered by third parties as a matter that may be incorporated through an additional agreement and specified limits.

Turkey also has separate General Conditions for Third-Party Liability Insurance, confirming that third-party liability is recognised as a separate liability-insurance category.

For major urban projects, third-party liability limits should not be treated as a minor add-on.

In densely developed areas such as Istanbul, damage to neighbouring buildings can exceed the cost of repairing the insured works themselves.

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6. Employer’s Liability Insurance Is a Different Risk Category

Construction sites create significant workplace-injury risk.

The contractor’s obligations concerning occupational safety and employee protection exist independently of insurance.

However, employers may also obtain Employer’s Liability Insurance to protect against qualifying financial liability arising from workplace accidents.

SEDDK separately publishes Employer’s Liability Insurance General Conditions, demonstrating that employee-related liability is treated separately from ordinary project property damage.

Accordingly, a CAR policy should not be assumed to provide full protection against claims made by injured construction workers.

A well-structured project should review separately:

• social-security obligations;
• occupational health and safety compliance;
• employer liability;
• employee accident exposure; and
• applicable insurance limits.

Insurance does not replace compliance with occupational health and safety legislation.

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7. Design Errors Can Fall Outside Standard CAR Protection

One of the most important exclusions in construction insurance concerns design and calculation errors.

The SEDDK Construction All Risks General Conditions exclude physical loss or damage to insured property resulting from errors in plans, designs or calculations under the standard wording.

This creates a major potential gap.

Imagine that a structural engineer makes a serious calculation error.

The building is constructed according to that defective design.

The defect later causes substantial physical damage.

The existence of a CAR policy does not automatically mean that every loss connected with that design error will be reimbursed.

This is one reason why professional indemnity insurance for architects, engineers and consultants can be important.

SEDDK separately recognises Professional Liability Insurance through its General Conditions.

For sophisticated projects, contractual risk allocation between:

• developer;
• architect;
• structural engineer;
• design consultant;
• contractor; and
• insurer

must therefore be coordinated.

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8. Defective Workmanship Is Another Major Coverage Issue

Construction disputes frequently involve defective workmanship.

Examples include:

• defective waterproofing;
• improperly installed reinforcement;
• faulty concrete;
• incorrect mechanical installations;
• poor roofing;
• incorrect façade installation; or
• defective finishing work.

The standard Construction All Risks General Conditions exclude damage arising from defective materials or faulty workmanship to the defective element itself, while damage caused by that defect to other properly constructed or defect-free insured property may fall within coverage depending on the circumstances.

This distinction is extremely important.

For example:

A defective water pipe itself may not be insured as a defective component.

But if the pipe suddenly fails and causes insured water damage to other parts of the project, the resulting damage may require a different coverage analysis.

Therefore, the investor should never ask only:

“Was there defective workmanship?”

The correct insurance question is:

“What exactly was defective, what damage resulted from it, and which part of that damage is excluded?”

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9. Construction Delay Is Generally Not the Same as Physical Damage

One of the most commercially significant misunderstandings concerns project delays.

The standard CAR General Conditions exclude consequential losses arising from matters such as:

• delay of construction;
• partial or complete suspension;
• failure to complete the project;
• termination of the contract;
• contractual penalties;
• loss of profit; and
• similar consequential losses.

This means ordinary Construction All Risks insurance is fundamentally different from delay-in-start-up or advanced-loss-of-profit protection.

If a fire damages a hotel under construction, CAR insurance may cover the physical reconstruction of insured works.

But what about the investor’s twelve months of lost hotel income?

That economic loss is not automatically covered merely because the physical fire damage was insured.

Large commercial developments should therefore analyse business-interruption and delay exposure separately.

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10. CAR Insurance Does Not Protect Against Contractor Insolvency

Another major misconception is that Construction All Risks insurance protects the investor if the contractor becomes insolvent.

Ordinary CAR insurance principally protects against insured physical loss or damage.

It does not generally function as a guarantee that the contractor will:

• finish the project;
• remain solvent;
• repay advances;
• pay subcontractors;
• meet completion dates; or
• perform all contractual obligations.

Those risks require different instruments.

One important instrument is surety insurance — kefalet sigortası.

SEDDK’s Surety Insurance General Conditions recognise various types of cover including:

• advance-payment guarantees;
• performance guarantees;
• contractual guarantees;
• payment guarantees; and
• maintenance/repair-related guarantees.

For example, a performance guarantee may protect the beneficiary where the contractor fails to perform obligations in accordance with the contract; the surety structure can in certain circumstances permit the insurer to arrange for completion through another contractor.

This is fundamentally different from CAR insurance.

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11. Performance Security and Property Insurance Should Not Be Confused

An investor may require:

Construction All Risks insurance

and separately:

performance security.

They protect against different risks.

CAR concerns physical project damage.

Performance security concerns contractual non-performance.

Advance-payment security concerns failure to properly account for or repay project advances.

The fact that the contractor has a strong CAR policy does not eliminate the need for appropriate contractual security.

Similarly, a bank guarantee or surety policy does not replace insurance against fire, flood or construction damage.

A sophisticated construction contract should combine the two systems.

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12. Building Completion Insurance Has a Completely Different Function

One of the most important forms of construction-related insurance in current Turkish practice is Building Completion Insurance — Bina Tamamlama Sigortası (BTS).

Its purpose differs fundamentally from CAR insurance.

BTS protects qualifying beneficiaries against the risk that the development is not completed under the circumstances specified by its regulatory framework.

Under current consumer rules, sellers in pre-paid residential projects containing 30 or more homes must, before beginning sales, either obtain Building Completion Insurance or provide at least one of the other recognised forms of security, such as a bank guarantee, progress-payment system or linked-credit security.

Therefore, Building Completion Insurance is particularly important for consumers buying apartments before completion.

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13. Building Completion Insurance Can Result in Cash Compensation or Completion of the Project

Building Completion Insurance is unusual because the insurer’s response is not necessarily limited to writing a cheque.

SEDDK’s current guidance explains that, where the insured completion risk occurs, the insurer may in appropriate circumstances choose between:

• cash compensation; or
• taking the place of the developer/contractor and arranging for completion and delivery of the project.

For consumers purchasing pre-paid homes, this is potentially significant.

Rather than simply becoming another unsecured creditor of an insolvent developer, the consumer may have rights under an individually issued security certificate.

The SEDDK guide states that where Building Completion Insurance has been selected, an individual security certificate should be issued for each consumer based on the housing sale price after the relevant risk assessment and procedural requirements are satisfied.

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14. Investors Should Ask for the Actual Security Certificate

A sales representative saying:

“The project has building completion insurance.”

is not enough.

SEDDK guidance emphasises that consumers should confirm that an individual teminat senedi — security certificate has been issued in their own name.

The certificate should contain key information including:

• the type of project;
• the maximum protection limit;
• the insurer’s compensation commitment; and
• the validity period, which should extend at least for the project period plus twelve months under the current BTS framework.

The existence and authenticity of the security certificate should be verified rather than assumed.

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15. Building Completion Insurance Is Also Important in Urban Transformation

Building Completion Insurance has gained additional importance in Turkish urban-transformation projects.

SEDDK’s current Building Completion Insurance guidance states that, for projects carried out in relevant areas and parcels under Law No. 6306, the construction contractor must, before obtaining the building permit, either obtain BTS or provide another form of security recognised under the relevant urban-transformation legislation.

Where BTS is used, qualifying landowners may receive individual security certificates based on the value of the independent unit subject to the construction agreement.

If a covered completion risk occurs, the insurer may provide cash compensation or elect to arrange completion of the construction.

This makes insurance and security documentation an important part of reviewing construction-for-land-share and urban transformation agreements.

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16. Public Construction Projects Have Their Own Insurance Requirements

Construction insurance is also highly relevant in Turkish public procurement.

The legislative rationale to Article 9 of the Public Procurement Contracts Law No. 4735 specifically refers to requiring contractors to obtain All Risk insurance against project risks so that public construction works can be protected and completed as planned.

Public Procurement Authority practice also confirms that, where required under construction contracts, All Risk insurance amounts and periods must be adjusted where contract values increase or completion periods are extended.

Consequently, contractors working on public construction should treat insurance requirements as part of contractual compliance, not merely risk management.

Failure to maintain the required policy can create contractual consequences independent of whether an insured event has occurred.

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17. Policy Periods Must Follow the Actual Construction Schedule

Construction projects rarely finish exactly when originally planned.

Delays may result from:

• permit issues;
• weather;
• supply-chain disruption;
• design revisions;
• employer instructions;
• additional works; or
• contractor problems.

The SEDDK Construction All Risks General Conditions provide that the policy period begins and ends according to the applicable project and policy rules, and that where works continue beyond the insured period an extension may require agreement and additional premium.

If the works continue after the policy expires without a valid extension, a major coverage gap can arise.

Therefore, project management should include regular confirmation that:

construction schedule = contractual schedule = insurance period.

They should not be allowed to drift apart.

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18. Partial Completion Can End Coverage Earlier Than Expected

The CAR General Conditions also provide that where parts of the construction are completed, handed to the employer or put into use before the overall project policy end date, the principal construction coverage for those parts may end and any applicable maintenance-period coverage becomes relevant.

This becomes important in:

• phased residential projects;
• shopping centres opened in stages;
• hotels with partial operational opening;
• infrastructure projects;
• large industrial complexes.

The investor should therefore examine whether a section that has entered operational use remains protected under the appropriate form of insurance.

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19. Maintenance-Period Cover Is Not Automatically Unlimited

Construction responsibility does not necessarily end on the day of provisional acceptance.

Many contracts contain a maintenance or defects-liability period.

Under the SEDDK framework, the maintenance period can be included as additional coverage subject to policy terms.

This is particularly useful where contractors return to the project during the maintenance period and their activities cause damage.

However, maintenance cover should not be misunderstood as a blanket warranty for every construction defect.

The precise wording of the applicable extension remains critical.

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20. Earthquake Risk Must Be Reviewed Separately

Turkey’s seismic risk makes earthquake coverage an essential project issue.

The existence of ordinary construction insurance should not lead parties to assume that earthquake-related exposure has been addressed at appropriate limits and deductibles.

SEDDK maintains separate regulatory arrangements concerning earthquake and volcanic-eruption coverage for Construction and Erection All Risks policies, confirming that earthquake treatment in such policies requires specific insurance analysis.

For major developments, investors should examine:

• earthquake limit;
• deductible;
• co-insurance;
• accumulation exposure;
• soil conditions;
• seismic zone;
• neighbouring-property exposure; and
• whether the insured value reflects full reconstruction cost.

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21. Insurance Does Not Eliminate the Contractor’s Legal Liability

This is one of the most important legal principles.

If a contractor performs defective work, the fact that the project is insured does not automatically release the contractor from contractual liability.

Insurance and legal responsibility are different questions.

The first question is:

Who is legally responsible for the loss?

The second question is:

Does an insurance policy cover that loss?

The contractor may remain liable to:

• the employer;
• project owner;
• purchaser;
• landowner;
• worker; or
• third party,

even where an insurer pays all or part of the damage.

Insurance may finance the consequences of liability.

It does not automatically erase the underlying liability.

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22. Insurers May Exercise Recourse Rights

After paying compensation, an insurer may in appropriate circumstances acquire rights to pursue persons legally responsible for the damage.

The Construction All Risks General Conditions expressly provide for subrogation following payment of compensation.

This means that the existence of insurance should not lead contractors or subcontractors to assume that:

“The insurance company paid, so the matter is finished.”

Where another party caused the insured loss, the insurer may later seek recovery.

Construction contracts should therefore regulate waivers of subrogation, insured-party status and related risk allocation where commercially appropriate.

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23. The Policy Should Name the Correct Insured Parties

A major construction project may involve:

• investor;
• landowner;
• employer;
• main contractor;
• subcontractors;
• lenders;
• project company;
• architects;
• consultants; and
• suppliers.

A policy should clearly identify whose interests are insured.

A contractor may say:

“We have insurance.”

But the investor should ask:

“Am I an insured party under the policy?”

Similarly, banks financing construction may require their interests to be recognised under the insurance arrangements.

Simply holding a certificate showing the contractor’s name may not adequately protect every stakeholder.

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24. Deductibles Can Transfer Significant Risk Back to the Project

Insurance limits receive substantial attention, but deductibles are equally important.

A policy may technically cover a risk while imposing a substantial deductible.

For example:

Covered loss: TRY 10 million
Policy deductible: TRY 5 million

The insurer’s actual exposure may therefore be dramatically lower than the investor expects.

Large deductibles may be commercially acceptable, but the construction contract should clearly allocate responsibility for them.

Possible approaches include allocating the deductible to:

• contractor;
• employer;
• party causing the loss; or
• project budget,

depending on the agreed structure.

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25. Insurance Exclusions Must Be Coordinated With the Construction Contract

One of the most dangerous situations occurs where:

the construction contract makes the contractor responsible for a risk

but

the insurance policy excludes that risk.

This creates an uninsured contractual liability.

The opposite problem can also arise where the contract assumes insurance exists but the policy provides a lower limit or narrower coverage.

Before signing a major project agreement, lawyers and insurance specialists should therefore compare:

construction contract risk allocation

against

insurance policy coverage.

The two documents should operate as one risk-management system.

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26. Investor Due Diligence Should Review More Than the Policy Certificate

A serious insurance review should examine:

• insurer identity;
• policy number;
• insured parties;
• project description;
• project address;
• insured value;
• coverage period;
• deductibles;
• general conditions;
• special conditions;
• endorsements;
• earthquake coverage;
• third-party liability;
• neighbouring-property coverage;
• contractor equipment;
• maintenance period;
• professional liability;
• exclusions;
• sublimits;
• premium-payment status; and
• cancellation rights.

For Building Completion Insurance, the individual security certificate should also be checked where relevant.

A one-page insurance certificate is not a substitute for reviewing the policy.

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27. Premium Payment Status Matters

A policy may have been issued, but investors should also verify whether the premium obligations necessary for the insurer’s responsibility have been satisfied.

Construction projects may continue for years, sometimes under instalment-based insurance arrangements.

Contractual monitoring should therefore include:

Has the policy remained continuously effective?

This is particularly important where the contractor, rather than the investor, controls premium payments.

The employer may wish to require periodic evidence that coverage remains in force.

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28. What Should a Construction Contract Say About Insurance?

A sophisticated construction contract should normally address at least:

• which policies must be obtained;
• who obtains them;
• who pays the premiums;
• minimum insurer requirements;
• required insured amounts;
• required liability limits;
• named insured parties;
• policy commencement date;
• policy duration;
• extensions following delay;
• deductibles;
• earthquake coverage;
• third-party liability;
• maintenance-period cover;
• evidence of premium payment;
• notification of cancellation or material amendment;
• claims-management responsibilities; and
• allocation of uninsured losses.

The phrase:

“The contractor shall maintain all necessary insurance.”

is often insufficient for a major project.

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29. Insurance Cannot Replace Technical Due Diligence

No insurance programme can turn a technically dangerous project into a safe investment.

Investors still need:

• soil investigation;
• structural design review;
• quality-control procedures;
• contractor qualification review;
• construction supervision;
• building-permit compliance;
• progress inspections;
• proper materials testing; and
• occupational health and safety systems.

Insurers themselves conduct risk assessments in certain products, particularly Building Completion Insurance, where SEDDK guidance notes that the insurer assesses matters including the developer’s financial position and previous project experience.

Insurance should therefore operate after and alongside risk prevention, not instead of it.

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30. The Best Construction Insurance Programme Is Layered

For a significant Turkish construction project, the risk-protection structure may therefore look like this:

Physical construction damage
→ Construction All Risks Insurance

Construction machinery
→ CAR extension and/or specialist machinery insurance

Damage to neighbours or third parties
→ Third-Party Liability Insurance

Employee injury exposure
→ Employer’s Liability Insurance and applicable statutory systems

Architect or engineer professional error
→ Professional Indemnity Insurance

Contractor non-performance
→ Surety/performance security

Advance-payment risk
→ Advance-payment guarantee or surety

Developer failure in qualifying pre-paid residential projects
→ Building Completion Insurance or another statutory security mechanism

Urban transformation completion risk
→ BTS or alternative statutory security where applicable

Earthquake exposure
→ appropriately structured earthquake coverage within the applicable insurance programme

No single policy performs all of these functions.

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Conclusion

Construction insurance in Turkey should not be approached as a box to be checked before work begins.

For contractors, insurance protects against potentially catastrophic project losses.

For investors and employers, it reduces the risk that physical damage or contractor failure destroys the economic viability of the project.

For consumers and landowners, Building Completion Insurance can provide particularly important protection where a development cannot be completed.

But the effectiveness of insurance depends entirely on how the programme is structured.

A proper legal review should ask:

What risks are insured?

What risks are excluded?

Who is actually insured?

What is the policy limit?

Is the project underinsured?

Are third-party liabilities included?

Does earthquake cover exist at adequate limits?

Are design errors protected through separate professional insurance?

Who bears the deductible?

Does the insurance period match the real construction period?

Does the investor have performance security if the contractor fails rather than the building itself being damaged?

Is Building Completion Insurance or another statutory security required?

Are individual security certificates available to consumers or landowners?

The most dangerous assumption in construction risk management is:

“The contractor has insurance, so we are protected.”

The legally correct question is:

“Which party is protected, against which specific risk, for what amount, during what period, and subject to which exclusions?”

Only after those questions are answered can an investor determine whether construction risk has genuinely been transferred—or merely appears to have been.