Where works are to be carried out under a JCT building contract 2011 to an existing structure, insurance option C in schedule 3 of that contract (“Option C”) is generally meant to apply. Under Option C, the employer is required to take out and maintain insurance both for the works and the existing structure. In respect of the policy of insurance for the existing structure, this is meant to cover the full cost of reinstatement, repair or replacement of loss or damage to the existing structure due to a “Specified Peril”. Specified Perils comprise fire, lightning, explosion, storm, flood, escape of water from any water tank, apparatus or pipe, earthquake, aircraft and other aerial devices or articles dropped therefrom, riot and civil commotion. The policies are to be in the joint names of the contractor and the employer and the insurers are to waive any rights of recourse they may have against the employer and the contractor as well as sub-contractors who are to be recognised as insureds thereunder.
This is relatively straightforward if the employer is the owner of the building and has taken out its own buildings insurance. However, it is not straightforward if the employer is the tenant in the building and the buildings insurance is maintained by the landlord. Landlords are, generally, reluctant to include tenants’ contractors, let alone their sub-contractors, as insureds under their buildings insurance policy predominantly because it may affect their premiums. Consequently, the employer is not in a position to satisfy the requirements of Option C. Alternative bespoke insurance arrangements, usually boil down to requiring the contractor to maintain third party/ public liability insurance, with an appropriate level of cover, to respond to damage caused to the building in which the works are to be carried out. This generally entails either:
- An amendment of Option C, so that the employer is not obliged to maintain insurance of the existing buildings and its contents (but which would still require him to insure the works), and consequential amendments to other clauses, such as clause 6.2, which cross-refer to Option C; or
- use of either JCT Insurance Options A or B (depending on whether it is the contractor or the employer who is to insure the works) so that any damage to the existing structure would be dealt with in the same way as damage caused to third party property. Some amendments to the JCT contract will be required including removing references to “New Build” from Option A or B as appropriate.
Whilst this ‘solution’ is not an unusual one, it is not a perfect substitution for the usual Option C insurance arrangements.
Material differences include the following:
- The contractor will carry the responsibility for and, therefore, control over maintenance of its public liability insurance rather than the employer. If the contractor fails to properly maintain that insurance, then the employer will have to look to the contractor itself to cover any shortfall in insurance recovery.
- Public liability insurance cover to be maintained by the contractor may not be sufficient to cover reinstatement costs in the event of substantial damage to or the entire destruction of the building.
- Under the JCT building contract, the contractor’s public liability insurance is only required to react to damage to property caused by the negligence, breach of statutory duty, omission or default of the contractor or those for whom it is responsible. Therefore, this insurance will not react to damage to the building caused by Specified Perils, which are the risks normally expected to be covered by Option C, unless it can be established that their occurrence has been caused by the negligence, breach of statutory duty, omission or default of the contractor or those for whom it is responsible.
Consequently consideration should be given to the insurance arrangements for existing buildings at an early stage in the procurement process and advice sought from appropriately qualified insurance advisers to put in place suitable insurance arrangements. However, bear in mind that in the next edition of the JCT suite of contracts, the JCT Contracts 2016, one key change concerns this insurance issue. JCT say they have included an extension of Option C to allow alternative solutions to the problems encountered by tenants and domestic homeowners in obtaining existing structures cover for contractors. We will have to wait and see just what those alternative solutions to this long outstanding problem are