Tackling Insurance Problems in Commercial Fit-Out Projects

As a tenant of a commercial building, finding a new space can be an exciting time for the business as a whole. But once you have found it, consideration then turns to the fit out. There are many considerations when undertaking an office fit out, including who to use as the contractor, ensuring you have a well drafted and protected contract for the works, and making sure that you have covered off all of the landlord’s requirements. In addition, insurance can be a major headache. Figuring out the right insurance strategy adds complexity to the process of getting the fit-out work done. Buildings and works insurance When it comes to fit out contracts, there are two key items which need to be insured – the building as a whole and the works which are being undertaken In most cases, the landlord takes care of buildings insurance for multi-let buildings and this is usually a provision of the lease the tenant has with the landlord. However the fact that the insurance is in place for the building itself is not the end of the story. If the fit out works cause issues to the building itself, the contractor or the tenant may face a form of liability for that damage without having recourse to the buildings insurance provider. This would be the case if for example the building insurance didn’t have the tenant and the contractor named on the policy. What’s worse is that if the landlord then claims on the building insurance, the insurer may bring a subrogated claim against the tenant or contractor Tenants often face resistance from landlords when they ask for a firm commitment to either share insurance coverage or get a waiver of subrogation rights. Landlords want to protect their building insurance policies and avoid potential claims that could affect their risk profile. Sometimes, tenants are only “noted” on the insurance policy, which means they receive limited notifications but aren’t fully covered. This therefore provides limited protection when considering the points addressed above. Co-Insurance as the Best Option The ideal situation for both tenants and contractors is to have co-insurance protection that covers risks associated with the existing structure. Under co-insurance parties insured under the same policy can’t sue each other for the same risk. Further, in terms of the common law rules on subrogation, an insurer who has paid out money to an insured can claim all or some of that money from a third party who caused or contributed to the loss. If insurance is taken out in the joint names of two or more persons, the insurer would not be able to enforce its rights of subrogation to bring a claim against one of the parties under the policy and if it does, the co-insured party who caused or contributed to the loss can raise a defence that they are a co-insured under the policy. The works policy Separate from the buildings policy itself would be the insurance in respect of the works. This type of insurance covers damage or loss to the works from any events covered by the relevant insurance. Frequently contractors will have CAR (contractor’s all risk) insurance which could cover the works but again further consideration is needed. For instance, does the policy cover the particular works being undertaken, would the tenant want to be named on that policy and would the landlord require to be named under the policy. In addition, if the contractor does not have suitable all risks insurance then one of the parties may need to take out an independent one-off policy for the works in question which will of course come at a cost. Overall, it is crucial to ascertain early on in a fit out project who is taking out which insurance and who needs to be named on each policy (or whether waivers of subrogation would be sufficient). The Conway v RFU Case and its Impact In April 2023, the Court of Appeal ruled on a case involving contractor Conway and the Rugby Football Union (RFU) (Rugby Football Union v Clark Smith Partnership Ltd [2022] EWHC 956 (TCC)). Although Conway was co-insured under the project insurance policy, the court decided that the co-insurance defence didn’t apply in that specific situation. The judgment emphasized the importance of the underlying contract in defining the scope of co-insurance coverage. JCT Insurance Option C was used which states that the employer co-insures the contractor on a composite basis for loss or damage to:

1. the existing structure due to the specified perils (JCT Option C.1) and
2. the works (or site materials) for the risks covered by the works insurance policy (JCT Option C.2).

It was held by the Court of Appeal that RFU and Conway were co-insured under the same project insurance policy but not for the same risk. There were certain losses that Conway were not covered for that RFU were covered for and when RFU claimed for those losses, Conway was not a co-insured for those losses. The court stated that the employer only had to provide insurance cover as required under JCT Option C. The JCT contract specifically stated that there was no need for a joint names policy to cover the expenses of fixing any loss or damage to the works resulting from faulty workmanship or design caused by the contractor but expressly covered the costs of rectifying damage to other property caused by those defects (which was the same risk covered by the project policy and for which RFU received indemnification). Furthermore, the all risks insurance was held to be separate contracts of insurance that protect the different rights and interests of the insureds as they were taken out and maintained on a composite basis. Accordingly, the court held there could be different cover between RFU and Conway. In the circumstances, Conway could not raise the co-insurance defence and could also not rely on the waiver of subrogation clauses in the insurance policy because these only applied to the risks for which Conway was insured against. A party cannot be protected by a waiver of subrogation clause for losses it was not insured against. The JCT Contract Approach Generally speaking, many of the JCT forms of contract do require works insurance to be in joint names of the employer (the tenant in this scenario) and the contractor. One example is the JCT Design and Build contract which has three insurance options, but none of which fully capture the potential intricacies of project insurance on fit out works and therefore it is likely that changes would be required to the standard form JCT in order for the insurance provisions to reflect what is happening in reality. Using Public Liability Insurance as an Alternative If co-insurance or a waiver of subrogation rights isn’t available, contractors can rely on public liability insurance to cover risks related to the existing structure. It’s important to ensure that the public liability policy adequately covers these risks. Tenant’s Responsibility and Indemnity Considerations Leases or licenses for work often include indemnity clauses that protect landlords from losses caused by tenant or contractor damage to the building. These indemnities may not align perfectly with those in the fit-out contract, which means tenants might bear some risks. It is important therefore to ensure that all contracts involved (including the fit out contract, the lease and any licence from the landlord to alter the property) are fully checked and any risks mitigated as far as possible. Early Collaboration is Key To effectively address insurance challenges, tenants should engage with landlords early on, preferably during lease negotiations to fully understand the extent of their cover. They should not assume that a project-wide joint names insurance policy will provide a fully comprehensive level of cover.  By seeking co-insurance solutions and maintaining open communication, tenants can build good relationships with landlords and ensure a smoother fit-out process. Conclusion Insurance considerations play a crucial role in commercial fit-out projects. Tenants should take the initiative to collaborate with landlords, secure co-insurance arrangements, and tackle potential challenges head-on. While insurance strategies can be complex, early engagement and a collaborative approach will lead to successful fit-out projects. We can help you or your business to negotiate and sign construction contracts that are protective for you. If you would like to discuss this further or would like more information, please contact our construction team.