Posted on February 29, 2016
Under the Joint Contracts Tribunal (JCT) agreement, there are various options relating to the insurance of the works and materials. The options can be confusing and it is important that both employers and contractors understand what they are signing up to and the implications.
For newly constructed properties the choices are comparatively straightforward.
Option A requires the contractor to take out and maintain all risks insurance of the works.
Option B requires the employer to take out and maintain all risks insurance of the works.
The only option referring to existing structures is Option C. This requires the employer to take out and maintain a joint names policy, to cover both the employer and the contractor for (a) insurance of the existing structure and their contents caused by ‘specified perils’ and (b) all risks insurance of the works. It also requires that the insurance policy contains a waiver of subrogation rights to ensure that the insurer does not pursue either the employer or contractor should damage occur as a result of either’s negligence in carrying out the works.
These conditions are less problematic if the landlord is the employer carrying out works to his own property. However, if the employer is a tenant carrying out works with the landlords consent it could be difficult for the tenant to comply fully with the conditions of Option C.
Normally the landlord would be responsible for insuring the existing structure under the terms of the lease. If the landlord permitted the interest of the tenant and their contractor to be noted on the buildings policy, the loss potential is greater and will undoubtedly result in higher premiums.
From the tenant’s point of view – the landlord’s cover may be on a restricted perils basis and not a specified perils cover basis as required by the contract conditions. Furthermore, if insurers refuse to include a waiver of subrogation clause under the landlord’s policy, the insurers could pursue the contractor should they cause major damage to the existing structure. In both instances the contractor could take action against the tenant for breach of contract.
There are ways of dealing with these issues and it is possible to arrange for the contract to be drafted to select either Option A or B. This is not a complete solution however as whilst the employer would no longer need to insure the existing structure, the onus would be on the contractor to provide an indemnity for damage to property. A contractor working on part of a large building would need to ensure that their public liability insurance limit was adequate should the entire building be damaged.
As demonstrated above, the JCT insurance conditions are far from straightforward and arranging effective cover can be equally complicated. We would strongly recommend that landlords and employers speak to their insurance brokers at an early stage when works are proposed so that the appropriate contract clause can be discussed and the level of cover agreed by all.