Mind the insurance gap

Construction insurance is a complex area, which is why, when drafting their suite of contracts, the JCT decided to try to make it as simple as possible. Under the 2011 form of the JCT Design and Build Contract, you have three options: Option A for new-build projects where the contractor is obliged to take out works insurance, Option B on new-builds where the employer has this obligation and Option C where works are being carried out in an existing building and the employer has the responsibility to take out insurance for the building/existing structures and the works being carried out in them. All you need to do is tick which option applies and off you go.

So far, very simple. For the most part, the only complication arose when a tenant was undertaking works in a building where it did not have a lease of the whole building. In these circumstances, the tenant would usually be required to maintain insurance for its demise but would not be required to take out insurance for the whole of the landlord’s building structure and the common parts.

Where the tenant wanted to carry out works within its demise (for example, fit out works) it was common for many years for the tenant to ask its landlord to add both it and its contractor to the existing buildings policy as a composite or co-insured party and to seek a waiver of the insurer’s subrogation rights against them. This often resulted in an increase in the insurance premium for obtaining the waiver, but if the tenant offered to foot the bill for the premium increase and any excess arising from a claim on the policy as a result of damage from the works then landlords were mostly happy to do so.

Then, around the time of the financial crash, something changed. The insurance market took an even more risk-averse approach than before and now we are increasingly finding that landlords’ insurers are no longer willing to co-insure the tenant and its contractor

Then, around the time of the financial crash, something changed. The insurance market took an even more risk-averse approach than before and now we are increasingly finding that landlords’ insurers are no longer willing to co-insure the tenant and its contractor, even where the tenant agrees to reimburse the premium increase and excesses.

In this not-so-brave new world, the only way the contractor can insure damage to the building is through its public liability policy. This is not the most appropriate insurance cover and the cost can often be disproportionate to the value of the tenant’s works, especially if the contractor is working on one floor of a multi-storey building.

The simple approach of choosing JCT Option C does not work, because under that Option the contractor has no obligation to insure existing structures under its public liability insurance. Further, the contractor indemnification of the employer’s losses for property damage arising from the works states that the contractor has no liability for loss or damage to existing structures caused by an insured event (aka “specified peril”) even where the contractor may have been at fault. In the event that the employer is unable to insure the existing structure under its landlord’s policy, the cost of damage caused by a specified peril would by default need to be met by the employer/tenant.

In February this year, while outlining the changes to the JCT suite of contracts for 2016, JCT chair Richard Saxon recognised the limitations of Option C when he announced that JCT would be introducing “an extension of Insurance Option C to allow alternative solutions to the problems encountered by tenants… in obtaining Existing Structures cover for Contractors”.

The JCT has not yet gone further details as to what these alternative solutions will be. It is possible that they will adopt the City of London Law Society’s Construction Law Committee’s proposed solution, whereby contractors accept liability up to a certain capped level for damage to existing structures, with tenants then being liable for, and required to insure against, any losses over and above the cap.

With the new JCT suite due to be rolled out later this year, it will be interesting to see whether they suggest any novel solutions to this perennial problem.

Stephanie Canham is head of construction at law firm Trowers & Hamlins