Blog Author: Douglas Brown – Renovation Underwriting
Douglas Brown, Managing Director of specialist renovation policy provider Renovation Underwriting, shares his views and insights on JCT contracts and renovation insurance more widely.
It might be a surprise to know that most home renovators, and many home insurance brokers, have no knowledge of JCT contracts. In most cases, it is only when a homeowner needs to arrange the insurance for their home undergoing work that they uncover just exactly what is involved. Very few even notify their insurer; presuming they are covered – and it’s a big problem.
Here at Renovation Underwriting, we work closely with brokers, project managers and contract administrators across the country to help them best advise their clients on insurance with JCT contracts. Our expertise is called upon to support thousands of renovation projects each year; but for us, it is never just about providing cover, it’s about making sure the employer and their home are properly protected. That’s why, through our dedicated CPD programme, we are driven to raise awareness and build knowledge in our and other professions so that employers get the right advice.
We were the first in this sector to provide a structured CPD session on contract works, because we believed the more insurance brokers knew, the more confident they’d feel about advising their clients to do the right thing. We now deliver learning not only to insurance brokers, but to surveyors, architects and party wall practitioners too.
We underwrite renovation works cases all day every day – and JCT contracts are often part of our discussions, as well as a key component in our formal CPD programme. Here I share some of the key advice that we offer to our brokers surrounding JCT contracts.
Which insurance clauses should a contract administrator choose for their client?
It doesn’t matter if the JCT contract concerned is the minor, intermediate or the standard form, the most appropriate way to insure any contract is for the employer to remain in control of the insurance. This means the following:
Minor Works 5.4b*
Intermediate and standard form 6.7C where there is an existing structure and 6.7B where the project is new build.
* Or equivalent numbered clauses in the JCT On-demand contracts
Why should the employer stay in control?
There are a number of reasons set out below:
- The insurable interest in the existing structure is 100% for the Employer and after the first stage payment the balance of insurable interest in the works also rests with the Employer. In a claims situation the Contractor is only entitled to claim for works which they have carried out, but for which they have not been paid. All other payments should go to the Employer.
- If the Employer relies on the Contractor’s insurance and that Contractor breaks a warranty in their insurance contract, the Employer is badly exposed. If the Contractor’s insurers decline to pay, the Employer is then gambling on being able to prove negligence against the Contractor and then on the balance sheet of the Contractor being enough to meet the quantum of the claim plus costs. Most Contractors don’t carry big reserves on their balance sheet to deal with this and end up in liquidation.
- The Employer knows that the premium for the single project ‘All Risks’ policy has been paid, because they paid it and what the terms of that insurance are.
- The insurance will meet the Employer’s obligations to their lender, if one is noted on either the structure or the works.
- The ‘All Risks’ cover provided for both the structure and the works ensures that all risks of loss are covered for both elements, meaning that a situation where the works are covered and the existing structure isn’t will not happen.
- If the insurance carries a non-vitiation clause it means that, although the policy is in joint names, the Employer and Contractor are assessed separately for breaches in the policy conditions. Given that a breach in policy conditions is only ever made by the party performing the works (the Contractor) the Employer will still be entitled to make a claim even if the Contractor is not.
Why is joint names insurance not universally welcomed by insurers?
Joint names insurance clauses in JCT contracts mean that both the Employer and the Contractor are first party to the insurance. This means that the insurers cannot seek to recover their losses from the named Contractor because they are the insured. Recovery of losses, post a pay out, is called subrogation and if an insurer gives this away by allowing joint names it is unlikely that their reinsurance will work effectively. Insurers will have to carry 100% of the loss themselves, placing the risk outside of their normal appetite and parameters.
If the Contractor has liability insurance, isn’t that enough?
This is perhaps the worst position to be in as an Employer. Proving negligence against a Contractor is incredibly hard, so getting paid could take a couple of years, if (and it’s a BIG IF) liability can be proved. Post loss, nobody puts their hand up to accept liability, so relying on someone to do the right thing is a pretty flimsy way of protecting a major asset.
Will using joint names by the Employer be more expensive?
In short, yes it will. However, because the balance of risk rests with the Employer, and the Contractor is only risking work in progress, it is easy to see who stands to lose the most. Given that insurers cannot subrogate, they have to price for no recovery options. Insuring the risk correctly by using the right clauses means that although the Employer pays 100% of the premium, they receive 100% of the cover. If they use another method, the likelihood is that they will end up paying 75% of the premium for 25% surety of cover and that is neither great value nor great risk management.
We know that the JCT contract guides acknowledge that homeowners can find it difficult to obtain insurance cover for works, but it is achievable. An employer’s home should never be at risk due to the lack of insurance or the wrong cover. That’s why we work so very closely with brokers and other professionals to help them set out the very best result for their Renovation clients. Find out more at www.renovationunderwriting.com.
Douglas Brown has been involved in property and works insurance for over 30 years. He combines an endless enthusiasm for his subject with a willingness to convey it to anyone who will listen. His strong commitment to this sector marks him out as a thought leader for both insurers and brokers alike. Having been involved at a senior level in a number of broking firms Douglas completed a buy out in 2010 to establish Porterhouse Brokers LLP from which Renovation Underwriting was founded.