As Francis Ho pointed out in his blog introducing this series on refurbishment projects, a large proportion of development works these days are high specification refurbishment works to existing buildings.  As there are certain peculiarities relating to these types of developments, Constructive thought it would be useful to explore some of these issues in further detail over the coming months.

The use of refurbishment contracts has led to greater use of ‘Option C’ contractors’ all risks insurance in JCT contracts (by way of reminder, the JCT’s Option A insurance is used in instances where a new building is to be constructed where the contractor is required to take out all risks insurance for the works and Option B in instances where the employer takes out such insurance). 

Option C insurance requires the employer to:

  • take out and maintain a joint names policy (usually in the names of the employer and the contractor) in respect of the existing structures, under which the insurers have no right of recourse against either party. This policy should cover the costs of reinstatement, repair or replacement for any loss or damage caused by any ‘Specified Perils’; and
  • take out and maintain a joint names policy for the Works (i.e. an ‘all risks’ insurance  policy).

Consequential losses arising from any damage to the existing structure are excluded from the JCT insurance requirements and so it should be noted that Option C does not provide the contractor with a blanket protection against loss or damage for refurbishment works; an employer is still entitled to make a claim against the contractor for any loss of profit, loss of stock, relocation costs or any other consequential losses which result from the damage to their structures to the extent the contractor is responsible for such loss or damage.

When an existing structure is in place and refurbishment/re-development works are planned, many employers assume that Option C will be applicable in its entirety.  There are, however, a number of difficulties that are regularly encountered where a failure to fully grasp what Option C insurance entails has led to significant risks being borne by the employer.  For example, an obligation to take out Option C insurance in accordance with the unamended JCT requirement is becoming increasingly hard to meet where the employer is leasing only a small part of a multi-tenanted building as in such cases it would usually be the landlord rather than the tenant who has the responsibility for insuring the existing structure (usually through buildings insurance). 

There are a number of ways of getting round this.  The landlord may be amenable to naming the employer and the contractor as joint named parties on its policy, in which case suitable amendments to the building contract should be made to accommodate this.  Unfortunately, however, a large number of landlords won’t agree to this (due to legitimate landlord concerns that in the event damage is caused to the existing structure and a claim is made under the insurance policy, the landlord’s insurance premium would increase in the future).  In addition to this, if the landlord owns a building where multiple tenants are undertaking their own fit-out works (such as skyscraper or shopping centre), the administrative burden to arrange for each of the tenants’ insurance arrangements to be dealt with can sometimes be deemed too great.

A potential answer is to arrange for the tenant as employer to insure the entire structure itself (although the additional cost implications of doing this will probably not be a feasible option where the tenant only lets one floor in a much larger building).  If it simply isn’t economical to insure the entire re-build value of the building then discussions will need to be held between the contractor and the employer as to which party is best placed (and willing) to carry the risk for existing structures under the contract and whether a hybrid of risk allocation can be reached. For example, sometimes contractors will have sufficient public liability insurance to cover the reinstatement of an entire building.  The employer must however note that public liability insurance policies usually exclude loss caused by specified perils and so it may be that the employer can take out a specific insurance policy to cover this lacuna in protection.  Whether the contractor’s public liability policy also contains any additional exclusions that leave the employer exposed should also be looked into and it would be advisable to make sure that insurers are involved in this process and, where possible, to obtain written confirmation from the insurers that whatever hybrid structure is put in place the insurance policy covers the risks referred to in the Option C insurance requirements.

If the contractor does not have sufficient public liability insurance to cover the reinstatement of the entire building, the parties could also discuss whether the liability of the contractor could extend to a level which is acceptable to both parties.  

In conclusion, a cautious approach to Option C insurance should be taken and both contract parties should ensure that all required risks are covered (one way or another) and the building contract updated appropriately to reflect this.  The Option C insurance requirements are based on legacy forms and have not changed fundamentally for years.  Is it time for an Option D to be included in the JCT suites which more closely reflects the issues mentioned above that are being encountered these days?

This is the first in our series of posts on refurbishment projects. Our next post in the series will focus on the co-ordination of multiple main contractors.