In this article, our Head of Client Development, Jason Baston, explores the insurance difficulties faced by owners, landlords and tenants when undertaking construction works involving existing or retained structures.

The popularity of renovating, extending, repurposing or adapting existing buildings has never been greater. The demand for greater space in an already dense built environment has seen a proliferation of extensions upwards, downwards, and outwards. Office reconfigurations and conversions to residential property have grown in popularity post-pandemic, a renewed focus on embodied carbon is enhancing the case for building retrofit, and now RAAC is driving a new wave of refurbishment.

Whenever works involve existing structures, insurance obligations in contract are notably different and more complex when compared to new builds. 

Employer insurance challenges

Under most JCT contracts the default minimum insurance employer obligations (clause 6.7C / Schedule 3C) are:

  1. Employer arranges Contract Works insurance in Joint Names
  2. Employer extends their existing structure and contents insurances in Joint Names for Specified Perils.

Under the first obligation, employers are tasked with protecting their own assets (just like we all do for our own personal assets, cars, homes, etc).

The greatest complication, however, is seen with the second obligation. This requires an employer to ask their insurer to provide a Joint Names extension to contractors – thereby waiving the ability to hold the contractor liable for damage they negligently cause to the existing structure and contents, that result from any specified perils.

Tenant insurance challenges

For tenants undertaking works, the second obligation is even more complicated. Given they are not the owner (nor typically the insurance policyholder) of the existing structure, the ability to achieve the Joint Names extension is even more remote. Tenants also commonly have obligations under lease to navigate, in addition to JCT obligations.

Landlord insurance challenges

For landlords, even though they have no contractual relationship with the contractor, robust governance of their asset risks and lease obligations when their tenants undertake works will often mean that the landlord (or the landlord’s insurer) requires full rights of recourse to be maintained. Landlord’s due diligence on protection of their interests then often follows.

What employers need to consider

It is increasingly common that employers cannot provide the Joint Names extension for existing structures and contents, often because insurers and/or landlords wish to retain their full rights of recourse. This resistance to the default 6.7C obligation commonly triggers contract amendments or a C1 Replacement Schedule, resulting in resistance from contractors and protracted discussions between employers and contractors and their legal advisors. 

Employers should be mindful that, along with additional time considerations, transfer of risk to other parties will typically incur additional costs, create additional due diligence, and may, on occasion, deliver false economies; particularly if the contractor’s insurances fail to provide the expected protection.

Construction is a high-risk industry and substantial values are at stake. Consequently, every employer wants optimum protection of their substantial cash outlay and investment; so that their project can be reinstated if lost or damaged.

Whilst not a contractual obligation, employers should also consider their other potential exposures when the works are undertaken, including lost revenues or additional costs resulting from delay in completion, or potential liabilities that may not be fully indemnified by the contractor.

How Miller can assist employers and contractors

It is critical that the employer procures expert construction risk advice and robust protection that is tailored to the nuances and risks of their project.

Miller’s market-leading construction team have extensive experience in delivering pragmatic 6.7C solutions. Our expertise and experience of deploying a wide range of approaches helps our clients to navigate their challenges.

Close coordination between the employer, construction insurance broker and their legal advisors is essential to address these challenges effectively. Miller regularly represents our clients in 6.7C negotiations between contracting parties.

We also help our clients to obtain optimum and bespoke protection for their construction assets and liabilities at risk; helping clients to understand their full range of construction risks and options on each project, whilst enabling informed decision-making at every step.