Insurance issues for fit-outs

When it comes to fit-outs, contractors and their employers face a tricky question: whose insurance covers the entire structure and its contents during works that affect only a part of a building? The question is particularly serious because the traditional JCT structure no longer reflects what is happening in the marketplace. So what can employers and contractors do to ensure that they are correctly insured for fit-out works?

The insurance in question is known as “Option C”. Under it, the employer is covered against damage caused by specified perils - for example, fire and floods - and the interests of the contractor are likely to be noted on the employer’s policy. However, this assumes the employer owns or is leasing the entire building. Where the employer is a tenant, the JCT is regularly amended to require the employer to procure evidence that their landlord is maintaining the requisite insurance and has noted the contractor and employer on the policy.

Until relatively recently, doing this was not a problem, but landlords have increasingly refused to name contractors on their policies, possibly driven by the risk of increased premiums. The tenants’ interests will tend to be noted, but the tenants’ contractors are left out in the cold. So what now?

In such situations, landlords are asking their tenants to look to their contractor’s public liability insurance. Under Option C, contractors maintain such insurance against damage to third-party property that indemnifies the tenant employer against any losses caused by the contractor’s negligence; the only carve-out to that indemnity is losses caused by specified perils.

If this route were adopted, the JCT contract could be amended to exclude the carve-out for specified perils to allow the employer to rely on the contractor’s public liability policy for all losses. To avoid leaving the contractor with the potential risk of the tenant employer’s economic losses, the contract should carve out those losses from the contractor’s indemnity. Since most businesses carry business interruption cover, this is a position that tenant employers may accept.

The problem here is agreeing that route with contractors, as they are regularly refusing to accept a material contractual risk that they have not traditionally had. For example, a contractor that is fitting out one floor of a £100m building will struggle to see why it should assume the risk for the building as a whole. Another issue is that some contractors’ public liability insurance will not be sufficient to cover the value of the underlying building.

Some contractors may accept the risk on their public liability policy if the cover is sufficiently high, but they will be exposing their policy to a risk they would not have had otherwise.

Could tenant employers consider insuring the structure and its contents themselves? Costs aside, this route is barred to employers that lease only part of a building as they cannot insure the entire structure.

Where there is an impasse, the tenant employer is left between a rock and a hard place if the public liability approach cannot be agreed. As an alternative, the employer or contractor can take out a bespoke form of insurance in the joint names of the contractor and the employer to cover the structure against negligence and specified perils. This approach will have a cost implication, but if the insurance is capped at an acceptable level the premium should not be prohibitive.

However, employers and contractors need to consider what happens if losses are higher than that cap. This is when it is up to the parties to make it work: some landlords will agree to waive their rights (and those of their insurers) in respect of any claims above the insured amount, and some contractors will agree that their public liability cover will shoulder any claims above the excess.

The first and most important step is to recognise the problem and work towards a solution before anyone starts on site, and even then, the arrangement needs to be documented properly. This is an issue which is unlikely to disappear quickly. A tenant employer of one floor would not want to find itself with the bill for replacing an entire building with no insurance pot to call on.

Tim Raper is a partner and Fiona Edmond is a solicitor with Speechly Bircham

This article was printed under the headline ’Whole hogs’