Following three significant fires in 2018, there has been an increase in the number of Excess Third Party Liability insurers adding Hot Works Conditions to their quotations for cover on new build and refurbishment projects. Concerned that this could leave the Employer and Project Team exposed in the event of a fire loss, our construction insurance experts discuss options below.

How this came about

In 2018, significant fires took place at the London Oriental Hotel, a Primark store in Belfast and Glasgow School of Art. In all three circumstances, the material damage insurers of the existing structure declined to add the contracting parties to the property policies and asked for the existing structure to be treated as Third Party Property to the Works. As a consequence, the insurers on all three contract works and property policies tried, and largely succeeded, to subrogate the material damage loss against the third party liability policies. 

The net effect of this was that the Excess Third Party Liability (XSTPL) carriers involved in each policy had to carry very significant reserves on their books and make claims payments running into tens of millions of pounds. These carriers felt that they were being ‘selected against’ to provide cheap property cover during any form of contract works, when the property is potentially at a higher risk of suffering loss or damage. This was irrespective of the contract works insurers having the Joint Code of Practice (JCOP) for the prevention of fire on construction sites, which has led to a massive improvement in fire safety during construction and a corresponding reduction in major fire losses (at least until 2018).

It is interesting to note that Option C of the JCT, which is specifically designed for Joint Names Insurance by the Employer of Existing Structures and Works or Extensions to them, proposes in its unamended form that the building owners’ Material Damage policy should be extended to give the benefit of Specified Perils* cover. However, as we have seen on many occasions in recent times, especially in circumstances where a refurbishment or fitting out project takes place in a multi-tenanted building, the almost default position has been for the construction contract to be amended so that the existing structure is deemed to be Third Party Property, and for this to be protected by use of a tower of Third Party Liability insurance. 

The JCT 2016 version includes a statement that should it not be possible (particularly if such Existing Structures insurances are a Landlord’s responsibility), the mere deletion of paragraph C1 has the effect of making the Existing Structures into Third Party Property. We believe that clients and their legal advisers have seen the above methodology work and applied it to other projects being carried out in non-multi-tenanted buildings.

* Specified Perils include 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, but excluding the Excepted Risks which are defined in JCT loosely as nuclear, sonic boom and terrorism. 

Introduction of Hot Works Conditions

Insurers felt that the correct way to treat this type of situation was for the Employer to insure the existing structures under their own Material Damage Property policy, and brought it Hot Work Conditions to encourage this going forwards. 

We have seen two examples of Hot Works Conditions being applied by insurers. Extractions from each are as follows.