Beware of killer clients: the insurance threat to fit-out providers

It is unlikely that many contractors are in a position to turn down work right now. In fact, most are fighting like starving cats for every scrap they can get. But would you accept a job fitting out an office on one floor of a tall building if the client required your insurance to cover the whole thing? This is a position interiors firms are increasingly finding themselves in as landlords, including Hammerson and British Land, are refusing to add them to their own insurance policies.

One industry source said: “Recent contracts are being rewritten to transfer the risk from the landlord to the builder. It used to be the case that we’d do a floor and the client would just add our name to its policy. This has been common practice for 20 years. But in the past six months we’ve seen landlords asking us to use our own insurance for about 10% of the jobs we’re going for. That is up from 0%.”

Tim Smith, the commercial director of fit-out contractor Overbury, adds: “Instances where landlords have been asking fit-out firms to take on the risk for an entire building during the period of works has been happening more recently. The issue is borne out of a rise in premiums and landlords and owners are looking for a way to transfer the risk and keep premiums down.”

So what’s a contractor to do? Turn down the work, or take on the job knowing it comes with a grotesque risk attached?

Moving the goalposts

Some developers, such as Hammerson, say they’ve always excluded contractors from their insurance. A spokesperson for the developer says the practice was adopted because “our claims record is important to us so we are careful to retain direct control over work which falls under its umbrella”. British Land says it uses its own insurance for shell-and-core, but doesn’t extend it to fit-out phase.

Christopher Hill, a construction lawyer at Norton Rose, says that other big clients have only recently adopted this behaviour. “This is something that some landlords have always done, but more developers are refusing to cover contractors,” he says. “The standard JCT scheme of insurance of existing structures during fit-out and refurbishment work is breaking down.”

The result is that contractors are being asked to put the building on their own third-party cover, but this is usually restricted to death, personal injury and damage to property. This means that any other economic losses, such as business interruption and loss of profit, both likely by-products of a fit-out problem, are effectively on the contractor’s balance sheet.

Hill says a contractors’ third-party insurance is unlikely to cover a flood, let alone damage caused by a fire. “In these cases, in a large modern office building, the value of claims can easily exceed the limit of indemnity of third party cover, which means the contractor is risking insolvency,” he says.

What can contractors do?

The concern is that many contractors are taking on work out of necessity and simply hoping for the best. “Contractors are increasingly agreeing at an early stage to insure an entire building to try and secure a project,” says Overbury’s Smith.

Hill recognises that smaller contractors are especially desperate for work, but he advises them against taking the bait. “I’d hold out against any clients who say they won’t insure me. I’d insist on being a co-insured party.” He says a number of firms are indeed standing their ground, although he concedes that these are larger contractors who may be in a stronger financial position.

Glen Walker, an executive director of the construction team at insurance broker Willis, adds that contractors should make sure they are properly covered before agreeing to take on work: “Firms should really try to limit exposure to this sort of risk,” he says. “For most small firms, liability will be about £1m, maybe up to £5m or £10m, but on a £500m building it’s pretty clear that this is simply not enough.”

Another option for contractors is public liability insurance. Most firms will already have this, but not enough to cover the entire damages on most buildings. But David Hayhow, a director in Lockton insurance broker’s real estate and construction division, says there are ways of using it to get the landlord to back down: “Say a contractor has public liability insurance to cover £10m but it needs it to cover more like £50m,” he says. “Buying this extra cover could cost in the region of £15,000. So, if a landlord says to a contractor, ‘no I am absolutely not prepared to cover you’ the contractor needs to say ‘okay, but we need to protect ourselves against that and this is how much it’ll cost us. We were going to do the job for £250,000 but taking all this into account how does £260,000 sound?’ This may colour the client’s opinion and it may decide that actually, it would be cheaper and less hassle to just extend its own policy after all.”

Hayhow adds that this type of communication between contractors and landlords is rare, as contractors are simply not aware that going back to the developer directly, or through its tenants, may just be the quickest and easiest solution to the problem.