27 October, 2020

Risk is always a factor when a contractor is fitting out space in an office building. Hot work, wet trades, protective systems turned off temporarily, even the simple task of moving bulk materials through the building can cause damage. It’s usual to cover these risks with additional insurance but putting a suitable policy in place can be complicated because of the difficulties of reconciling the respective positions of the landlord, the tenant and its building contractor.

The obligation to insure is usually set out in the lease where it’s part of a broad range of controls that regulate how a tenant is able carry out work in the landlord’s building. The responsibility of making sure the risks of building work are insured rests with the tenant. It, in turn, typically passes this obligation to its builder through the terms of the building contract between the parties.

The most commonly used forms of building contract issued by the Joint Contracts Tribunal (JCT) cover risks like personal injury or death, damage to the fit-out work or to the landlord’s building and its contents. It’s the latter that presents the biggest challenge.

Of the several insurance options available in the standard building contract the most appropriate requires the tenant to insure the existing building and its contents in joint names with its contractor for the life of the project. In the past landlords have been willing to allow their own building insurance to be used by adding the project to their existing cover. After all, that insurance is funded by the tenant through its lease. That was a neat solution because the landlord could control how the risk is covered off, and establish a link with the contractor, as the tenant doesn’t have an insurable interest in the building, and it avoided the complications of having two policies on the same building at the same time.

Now landlord’s insurers have become increasingly reluctant to do this, even for an additional premium. In large buildings, if the tenant has to buy insurance for its fitting out work, the cost can be very high, often way out of proportion to the scale of the project, so it’s a job that many tenants feel is better carried by the landlord. For their part, landlords are concerned that this might expose them to higher premiums as well as the administrative burden and risk exposure that comes from having to insure for the tenant, but the cost of having to put insurance in place could become a blocker making it impossible for tenants to actually fit out.

Where the landlord won’t allow its building cover to be used, insurance experts have developed solutions. Two, are thought to be the most promising. In the first, the tenant and its contractor take out a joint names policy to protect themselves from action from the landlord’s insurer under its policy. This type of action is known as subrogation and it allows the building insurer to pursue a third party in the event of a loss. In the second, the landlord is asked to agree a partial waiving of its insurer’s subrogation rights for claims above an agreed cap provided there is a suitable joint names Public Liability policy up to the value of this cap. This can mean an amendment of the contractor’s existing policy is needed to acknowledge the Employer’s interests, or a separate joint names policy with the same effect. From a contractor’s perspective, unless specifically excluded by a contract amendment, this latter would expose it to claims for economic loss from the landlord. If the building in which it is working is very large, the magnitude of claims against its Public Liability insurance could make it unwilling to accept this approach. Despite these shortcomings, if the contractor’s misgivings can be addressed properly, this is probably the most effective route. Agreeing a cap is key here, because quantifying the risk means that a specific policy and cost can be determined, and everyone is clear of the maximum exposure.

There is a third approach that involves a layering of risks. This sees the builder accepting a quantum of risk up to an agreed amount. Above this, the tenant might accept the next layer with the landlord’s insurance only being called upon if claims exceed this amount.

Whichever route is chosen it’s necessary to amend the building contract. That can take time and involve lawyers as well as the builder’s insurers. It’s never particularly easy to achieve agreement in situations that demand an alignment between the lease and the building contract especially with each party needing to satisfy its own insurers and lawyers along the way.

No one expects tenants to be able to fit out without accepting responsibility for insuring the risks that go with it. Landlord’s reluctance to allow their own buildings insurance to be used adds huge complexity to the situation and means arrangements need to be improvised to provide proper cover. In some circumstances, it could even make it impossible for a tenant to fit out. Our advice is that early engagement is essential if delay is to be avoided. Too often we’ve seen contractors mobilised and waiting to start but held up outside the building waiting for someone to blink in the Mexican standoff between landlord, tenant and builder about who insures what.