When a tenant wishes to carry out works to premises which form part of a larger property, it is very often that the insurance arrangements in the relevant documents (agreement for lease or licence to alter for example) do not take into account the practical realities of what and who needs to be insured.

Fit-out works are often carried out pursuant to the terms of a JCT form of building contract.  As none of the JCT insurance options caters specifically for the fit-out scenario, the tenant needs to ensure that the building contract be amended to reflect what has been agreed with the landlord and the contractor.  The key relevant insurances a tenant should consider are:

  • All risks insurance for physical damage to the fit-out works and any materials to be maintained until practical completion of the works.
  • Buildings insurance for physical loss or damage to the existing structure;
  • Public liability insurance for death or personal injury to third parties or physical damage caused to the third parties’ property.

With regards to the all risks insurance cover for the works, there is generally no difficulty in taking out such insurance in the joint names of the contractor and the tenant (employer).  The contractor will, as a matter of course, maintain public liability insurance to respond to claims by third parties who are not employees of the contractor.

However when it comes to deciding who is best placed to cover against the risk of damage to the building as whole, more often than not, the parties find themselves at an impasse. 

The existing buildings insurance would seem to be obvious solution to the problem, as long as the tenant and contractor are added as insureds for the duration of the fit-out works.  In practice however, landlords are unlikely to accept going down this route because of concerns related to potential increases in premiums and the administrative burden involved. 

Where the landlord is uncooperative, the tenant may:

  • seek a waiver of subrogation against itself and the contractor from the landlord’s insurer; or
  • rely on the contractor’s public liability insurance (as long as the limit of indemnity is sufficient to cover the cost of re-instating the building).  In practice it is very rare for a fit-out contractor’s public liability insurance to cover reinstatement costs.  As such, the tenant may require an uplift in such cover (the cost of which it would bear).  Sometimes the parties may be able to reach a compromise where the level of cover under the public liability insurance is increased to respond to at least a certain percentage of the reinstatement costs and the landlord agrees to hold the tenant harmless for any damages above the agreed limit.

The question of insurance in the context of tenant fit-out works is proving time and time again to be a difficult one to answer.  Tenants and landlords alike should ensure that insurance is no longer an afterthought, but explore mutually convenient arrangements at the heads of terms stage, as a mutually convenient solution may take time to be agreed.