Contractors All Risks Insurance - Changes Introduced By The Updated JCT 2016

One of the key changes introduced by the updated JCT 2016 suite of contracts is to provide a new insurance option where the Employer is unable to comply with the requirement to take out a joint names insurance policy for the "existing structures" of a building (under the JCT Option C arrangement). This is a welcome change (or at least nod in the right direction) and one which seeks to address one of the more difficult issues arising in relation to refurbishment works contracts, particularly in multi-let buildings.

What are the issues?

By way of reminder, the issues commonly faced by Employers and Contractors when trying to decipher the insurance arrangements applicable to works in multi-let buildings are as follows:

1. JCT Option C requires the Employer to take out a joint names policy for the Works and the existing structures on a "composite basis". This is typically procured through an existing buildings insurance policy, either with a separate works policy taken out or with an amendment to the buildings policy to include the Works.
2. A Contractor working in an existing building will be keen to see that such cover is in place – without it the Contractor may be left exposed to a subrogated claim from the insurer of the building. This may be significant if the Contractor causes damage to a large or high value building and such claim may not be covered completely by the Contractor's public liability insurance policy.
3. Difficulties arise where the Employer is not the insured party under a building insurance policy and/or has no control over the terms of such policy. This is often the case in a multi-let building where a landlord and its insurer are likely to be unwilling to include the Contractor as a joint insured.
4. In the event that the Employer is not able to comply with the requirements of JCT Option C, amendments will need to be made to the standard JCT terms to reflect, in particular, the scope of cover that the Employer is able to procure. Typically this will mean that (i) the Contractor is not a joint insured in relation to the existing structures (and will be relying instead on the scope of its public liability cover); (ii) the Employer is obliged only to "procure" or use "reasonable endeavours to procure" that the Landlord maintains cover of the existing structures; (iii) consequential amendments are required to try and address what may happen in relation to reinstatement works and/or (iv) very often the insurance provisions in the relevant agreement for lease / licence for alterations document do not align with the insurance provisions under JCT Option C. In short, an imperfect and potentially very risky position.

How does the JCT 2016 suite of contracts address this issue?

1. Although JCT Option C has been retained the Parties now have the option to replace paragraph C.1 with a "C.1 Replacement Schedule". This will give the Parties the ability to agree an alternative arrangement for the insurance of the existing structures where a joint names policy cannot be obtained by the Employer.
2. The JCT has given some initial guidance as to how populating a C.1 Replacement Schedule may be approached, depending on the scope and nature of the Works. The examples given include:
3. • For simple projects, the Contractor may choose to rely on its public liability cover. The Parties will need to ensure that such cover does not contain any exclusions of liability relating to the Works or the existing structures.
   • For more high value / complex projects, the Parties (in conjunction with the landlord of the building) could investigate a layered coverage, to include the Contractor's public liability cover, a top up of existing structures cover to be maintained by the Employer and the landlord's existing structures cover.
   • For very high value / complex projects, the Parties (again in conjunction with the landlord of the building) may decide that insurance will not be maintained for the full reinstatement value. Careful consideration will need to be given as to which party bears the risk of any shortfall.

What does this mean going forward? 

The inclusion of an optional C.1 Replacement Schedule should be welcomed. It has the potential to provide much needed flexibility to an issue which has historically been difficult to reconcile within the legal framework for refurbishment works. However, if the industry is going to get the most out of this change, the following approaches will be needed:

1. An Employer tenant and its landlord will need to consider the C.1 Replacement Schedule when drafting any agreement for lease / licence for alterations documentation. It is in all parties' interests for the insurance provisions of these documents to align with what is required under the building contract. Both parties should discuss (and reach agreement on) the contents of any C.1 Replacement Schedule with the input of specialist insurance advisors.
2. The Employer and Contractor will need to be clear what is required in relation to existing structures insurance and what is needed in relation to the Contractor's public liability insurance (and who bears the cost of any upgrade in the cover required). This should be addressed before and during the tender stage, again with input from specialist insurance advisors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.