Corporate occupiers: ensuring adequate insurance for your works

Where a tenant of a multi-let building wants to undertake works, they will need to ensure that adequate insurance is placed. This sounds simple enough, but scratching away the surface can often reveal a knotty problem when it comes to insuring the existing structure of the building. Missed or left unresolved, the tenant will be exposed to potential claims from the building insurer, heavy costs and a breach of the building contract should damage to the building occur whilst carrying out the works. All too often an issue arises at a stage which could delay the start of works which could have been addressed during the infancy of preparations. 

What insurance should a tenant consider?

The main insurances a tenant should consider for the project are:

1. Insurance of the works themselves – to cover physical damage to the works and any materials; 
2. Public liability insurance – for death and personal injury to third parties or physical damage caused to the third parties’ property; and
3. Insurance of existing structures – to cover physical loss or damage to the existing structure of the building and the focus of this article. 

Sounds simple enough, so what’s the issue?

Insurance of the works themselves tends not to be problematic. Contractors will often obtain cover for this under a construction all risks policy which they may already have placed as part of their business. Otherwise, the tenant and contractor can take out a joint policy.

Likewise, public liability insurance tends to be unproblematic, but the terms of the policy should be reviewed by the tenant’s insurance broker to ensure the policy adequately covers the risks involved e.g. negligent and non-negligent damage and any exclusions. 

However, insurance of existing structures will often be problematic and the solution can be complex. This is because it is common under building contracts for the tenant, as Employer, to be responsible for maintaining a policy in the joint names of the contractor covering the existing structures for any loss or damage due to any ‘Specified Perils’. However, usually it will be the landlord of the multi-let building who places the insurance for the building without the tenant being jointly named and the tenant will therefore have no insurable interest in the building outside of their demise. If this mismatch is not resolved and damage to the existing structure is caused during the works this could result in the building insurer exercising its rights of subrogation against the tenant and the contractor. The contractor will also have a claim against the tenant for breach of the building contract. How this is addressed will be project specific and will depend on a myriad of factors such as the type and value of the building, the value of the works, the availability of insurance products, the landlord’s insurance arrangements etc. Possible solutions include:

1. The landlord agreeing to add the tenant and contractor to the buildings insurance policy as composite insured. This is the best option with costs of any increased premiums being passed on to the tenant. However, whilst previously this was often accepted by landlords, the current trend is that they will now be unwilling to do so as landlords (particularly those with block policies) will not want to jeopardise their risk profile. 
2. The landlord procures a waiver of subrogation from the buildings insurer for the tenant (where this has not already procured under the lease terms) and the contractor. This could be provided as a full waiver, or, in a layered approached e.g. the tenant and contractor rely on the contractor’s public liability insurance up to the limit of liability it has placed and the waiver of subrogation is provided by the buildings insurer above that limit of indemnity. As above, the contractors public liability policy would need to be reviewed. However, as with adding the tenant and contractor as jointly named, landlords now tend to be unwilling to do this, or at least in respect of the contractor.
3. The contractor tops up its existing limit of indemnity for its public liability insurance to the reinstatement value of the building. However, contractors may be unwilling to do this where the cost of doing so is vastly disproportionate to the value of the works involved. 
4. The tenant obtains a project specific insurance policy to cover damage to existing structures. However, this is not always available and where it is, it can be extremely costly. Tenants are also unlikely to possess all the necessary information regarding valuations, methods of constructions and contents of other areas of the building etc.

Tenants already in occupation may have a hard time trying to get their landlords to assist on options A and B (depending on the terms of their lease) whilst those looking to take new space and carry out their initial fit out works may find landlords more amenable to these options in order to secure the tenancy. In the latter case, this would ideally be ironed out during the heads of terms stage.

Key takeaway

Insurance of existing structure is often not straightforward for a tenant. The landlord’s cooperation will frequently be required and the tenant should look to engage with the landlord, the contractor and the parties’ advisors as early as possible to agree the insurance position and cost allocation and make sure this is reflected in the building contract and letting documents.