Fires on construction sites: A burning question

We are only too well aware of the possibility of fires breaking out in buildings and the devastating consequences that can ensue. This column will not address the general topic of fire safety, however, but rather the topic of fires on construction sites. 

In recent years we’ve all seen the press reports of the high-profile blazes at the Bank Buildings in Belfast, the Mackintosh building at Glasgow School of Art, the Mandarin Oriental hotel at Hyde Park in London and of course last year at the Notre-Dame cathedral in Paris – all buildings that were undergoing or had recently undergone major renovation works. The question of how the risk of fire (and similar risks) on construction sites should be allocated between the parties involved – and what insurance cover should be maintained in respect of it – is an important one. It is also one that is getting increasing attention from insurers in the light of those recent fires. 

Where a building has multiple tenants the question of how the risk of loss or damage to the building caused by fire and flood due to the tenant’s works is more complex

Where the project is a new-build, or where it is a renovation project in which the employer owns and occupies the whole building, the insurance solution is fairly straightforward.

However, where a building has multiple tenants and one of those tenants wants to carry out fit-out works to its leased area, the question of how the risk of loss or damage to the building caused by fire and flood due to the tenant’s works – and how insurance against that risk should be dealt with – is more complex. 

Generally the building will be insured by the landlord. In past years the tenant would normally approach the landlord at an early stage to add the contractor (and the tenant) as a joint insured to the insurance policy for the building or at the very least obtain a waiver of the insurer’s subrogation rights in respect of the contractor (and the tenant) for any damage done to the existing structure of the building as a result of the tenant’s works. This would mean that the port of call for payment of the costs of making good damage caused to the building would be the landlord’s insurer and as a result the tenant and contractor would not expect to take this risk or insure against it.

However, more recently the practice has grown up whereby most landlords refuse to add the tenant and its contractor to the insurance policy for the building or to procure a waiver of subrogation rights – either because they’ve been advised to do this by their insurers or because they wish to protect their investment. 

This will require a careful analysis of the contract terms and the policies involved

As a result, any tenant of a multi-tenanted building who is intending to carry out fit-out works will need to consider this risk and how to address it at any early stage. When the tenant is negotiating a new lease, the potential to address this issue with the landlord at an early stage is there. But when the tenant is already in occupation of its premises under the terms of an agreed lease that does not address this issue it gets more complicated. 

If the landlord does indeed refuse to add the contractor to the insurance policy for the building or to procure a waiver of subrogation rights for the contractor then the tenant will need to consider how to deal with the risks that arise. 

One of the key areas to look at will be the extent to which these risks will be assumed by the tenant’s contractor under its building contract and the extent to which the contractor’s insurances will provide cover in respect of them. This will require a careful analysis of the contract terms and the policies involved – as well as the cost of the premium for the cover needed. 

Under the default position in most JCT contracts the risk of damage caused by fire and flood to the building would be assumed by the employer, and the employer would be required to insure against those risks in the joint names of itself and the contractor. In the standard NEC suite of contracts this risk would be assumed by the contractor, and the contractor would be required to insure against those risks in the joint names of itself and the employer. Neither of these solutions may work – or be proportionate – in these circumstances. The JCT suite recognises this and allows the parties to agree an alternative approach that would be documented in a “C1 Replacement Schedule” and referred to in the Contract Particulars. 

Tenants and their project managers and contractors need to be aware of the issues

This is a complex area and one that can have significant consequences for the parties involved if it is not tackled at an early stage. Agents need to be aware of this issue when drafting heads of terms for lettings. Lawyers acting for tenants need to negotiate and include appropriate drafting, not only in agreements for leases but also in any licences for alterations. Tenants and their project managers and contractors (and their lawyers) need to be aware of the issues and ensure they are addressed at an early stage in the negotiation of the building contract and that the provisions of the standard form building contract being used are completed and amended as necessary to reflect the allocation of risk agreed.

Fortunately, the City of London Law Society’s construction and land law committees have just published a guidance note (available on the City of London Law Society’s website, www.citysolicitors.org.uk) which explains these issues in more detail and sets out a number of potential solutions available to the parties to deal with the risks and insurances involved. Given the significance of the issue for everyone involved, and the potential consequences of getting it wrong, I recommend that anyone involved in these sorts of project accesses the guidance note and keeps it bookmarked as a favourite.

Victoria Peckett is a partner in, and co-head of, the construction and engineering team at CMS UK