JCT Insurance Options: what's the right fit for fit-out?

Where a tenant is fitting out premises within a multi-occupied building, the JCT's standard insurance options are not always appropriate and, left unaddressed, place unintended and severe risks on the tenant.

A tenant looking at the JCT contract will quickly decide that Option C is the right one for their fit-out project as it applies to works being carried out within an "existing structure". The other two options – A and B – apply to new buildings, so on the face of it this approach seems to be correct. However, it may in fact leave the tenant exposed.

The problems with Option C  

Under Option C, the tenant will be required to take out and maintain two joint-names policies:

(i) an "all risks" policy covering the works themselves; and

(ii) a "reinstatement" policy covering the costs of repair arising from damage to the existing structure and contents caused by 'Specified Perils' (such as fire and flood).

The all risks policy is straight forward enough, however difficulties arise in relation to the reinstatement policy, due to the way commercial property is insured, in a number of areas.

Firstly, the landlord will already have building's insurance, and therefore a tenant taking out a reinstatement policy is effectively seeking to insure damage to the same building, which risks vitiating one or both policies, potentially limiting either party from recovering. 

Secondly, there is the question of whether the tenant even has an insurable interest in relation to the rest of the building, in which case it will either not be able to acquire the policy or may find the policy doesn't respond in full to the damage.

Thirdly, even if they can get it, the cost of the reinstatement policy is likely to prohibitive to the tenant, especially if the building in question is a high value, high storey office property, when compared to the cost of the works.

Lastly, there are also practical issues in relation to a tenant trying to arrange this cover, such as valuations, assessing reinstatement costs and determining the building contents of the other areas of the building.

What are the solutions?

Of the tenants who pick up on these issues, some believe that they have found the solution in simply relying on the landlord's existing policy to double up as a reinstatement policy. Unfortunately this is rarely the right answer: the landlord's policy will not automatically be compliant with the requirements of Option C, particularly in relation to the joint names and waiver of subrogation requirements, meaning the tenant is in breach of their insurance obligations to the contractor, potentially leaving them facing the entire bill for the reinstatement.

Perhaps the most straightforward solution is for the landlord to extend the existing building insurance policy and name the tenant and contractor on it and, currently done, this would be an end to the issue.  However, in recent years we have seen many landlords refusing to do so because they neither want (i) the premium to be affected by a contractor's claim nor (ii) the administrative burden.

Faced with this scenario, the tenant may then look to the other insurance options and believe it can place the risk on the contractor under its public liability policy.  Tenants should also be wary with this approach, as not all public liability policies will respond to Specified Perils and/or may not consider the existing structure as "third party" property. Further, even if the policy does respond, it may not cover the full reinstatement value.  So, again, the tenant risks being uninsured or underinsured, having failed to comply with its insurance obligations to the landlord.

Thankfully, some contractors are now dealing with this issue head-on and tender on the basis that they offer a solution; namely a public liability policy with an adequate limit of indemnity which responds to losses to the existing structure and contents arising from Specified Perils. This significantly reduces the tenant's exposure and means they will not be faced with the prospect of unforeseen insurance premiums and the headache of organising cover.

Amend your contract to fit

Whatever the solution, insurance of a tenant's works is not an issue which should not be ignored by any of the parties concerned, and early discussion, including with the landlord, is important. Once the approach is agreed, the JCT contract will need to be amended accordingly, to avoid any nasty, and uninsured, surprises for the tenant.