In the construction insurance market, we may sometimes come across a client who is a tenant within an operational existing structure who is employing a contractor to carry out a non-structural fit out.
Commonly the Joint Contracts Tribunal (JCT) form of contract is utilised and Insurance Option C is assumed to apply, but this insurance option comes with two key requirements:
- C.1 – the Employer must maintain a policy in joint names of the contractor, covering the Existing Structures for any loss or damage due to any Specified Perils.
- C.2 – the Employer must maintain a policy in joint names of the Contractor for All Risks insurance covering the contract works.
Where the Employer is the tenant, they are not the landlord, and therefore they cannot achieve the requirements of C.1, at which point their legal advisor will need to amend the contract to avoid a breach of contract conditions. JCT 2016 contracts allow replacement provisions where C.1 cannot be achieved and the JCT’s view is that preparation of such replacement provisions must be assigned to insurance professionals.
At this stage, it is key that the tenant’s contractor agrees a position with the landlord regarding how they are to be treated during the works in respect of the risk of damage being caused to the existing structure.
There are three main options in this situation:
- The ideal solution would be that the landlord agrees to name both the tenant and their contractor as composite insureds on the existing structures property policy, which would mean that they cannot subrogate against them in the event of a loss. Failing this, a written confirmation of a full waiver of subrogation would suffice.
- It is often difficult to obtain the above solution, given that naming the tenant on a policy could affect the landlord’s claims experience – so a secondary option would be to agree a cap on liability for the tenant during the works. The property insurers can agree to provide the tenant and their contractor with a waiver of subrogation above a specified limit, which is commonly a nominal value e.g. GBP5m or GBP10m. From the tenant’s contractors point of view in this case, the lower the better.
- Should this not be something the landlord and their insurers are willing to agree to, the worst case scenario is that the tenant’s contractor is not given any beneficial cover on the property insurance and are held fully liable in respect of damage to the existing structure arising out of the works. The solution in this case would be for the tenant to procure project specific Third Party Liability insurance to protect themselves.
Typically the tenant is automatically named on the existing structures policy due to the fact that they contribute to the premium. As a minimum, the tenant should expect a full waiver of subrogation from the landlord’s property insurers. It is important that the tenants legal advisors are consulted on this point. Ultimately, this is a negotiation between the landlord and tenants contractor, assisted by their insurance and legal advisors as appropriate. However it is appreciated that as the tenant is employing the works, they may have to facilitate the negotiation.
Furthermore, the size of the contract works in comparison to the reinstatement value of the existing structures needs to be taken into consideration.
Should options 2 or 3 above be the case, it is imperative to keep the appropriate legal advisor appraised and ensure that the contractor is carrying sufficient Third Party Liability insurance up to at least the reinstatement value of the existing structure, or at least to the relevant liability cap, per option 2 above. This is because it is likely that the existing structure is to be deemed third party property to the contractor, and possibly to the tenant too and this must be clearly disclosed and evidenced to the Third Party Liability insurers. This will ensure you have enough cover should there, however unlikely, be a total loss arising out of the works.
When carrying out tenant fit out works to an existing building, there are three key construction insurances to consider:
- Firstly, Construction All Risks (CAR), that provides indemnity for damage to the contract works, permanent or temporary.
- Loss of Revenue/Delay in Start Up cover is available to insure financial losses you would suffer following insured damage to the contract works (note that this insured damage must be covered under the Construction All Risks insurance to trigger any cover under the Loss of Revenue insurance). For the tenant, the financial loss could be the cost of sourcing alternative accommodation in event the works are damaged and therefore delayed.
- Finally, Third Party Liability insurance protects tenants against their legal liability for damage or injury to third parties or third party property, but the extent to which this is required will be defined by the outcome of any negotiations with the landlord in respect of cover provided under their property programme.
Although the legal advisor will ultimately sign off the final contract wording, it is essential not to underestimate the importance of consulting your insurance broker to understand if there is any relevant text that should be included in the contract to make the final proposal for insurances clear. The insurances must accurately reflect the contract requirements, to prevent the tenant being exposed to a breach of contract and, consequently, any losses associated with the breach.