Insurance and JCT Contracts

Blog Author: Dave Cahill – Senior Partner, Divisional Business Development Leader, JLT Speciality Limited


The construction industry has returned to the headlines recently with the fires at the Glasgow School of Art and the London Mandarin Oriental Hotel. These incidents occurred either during or immediately after refurbishment works. Thankfully the losses were restricted to property damage and disruption with no loss of life. Nonetheless these events do serve as a powerful reminder of the different risks presented when working in existing structures.

The JCT suite of contracts has for many years sought to address the different risk positions presented by new build and refurbishment/extension projects. Fundamentally, JCT contracts recognise that working within existing structures, particularly when the project value is at the lower end of the spectrum, can create a risk/reward imbalance skewed against the contractor. This risk of damaging the existing structure and disrupting the employer’s ongoing operations can be much greater than the potential profit from the project. Even if this risk is partly or wholly insured, the contractor carries the risk of increased insurance premiums, either from an increased risk perception or as a result of increased claims payments. This subtlety is not reflected in the other major UK forms of contract.

The Background

Refurbishment or extension work has a very different risk profile to new build projects. The enhanced risks relevant to this discussion involve damage to the existing structure and its contents. From the employer’s perspective there will be an increased risk to the property and where applicable, ongoing commercial operations. The contractor will be concerned that despite its best endeavours, significant damage and disruption can occur.

JCT’s Standard Solutions

Different project types have been catered for over the years by three alternative insurance options in JCT contracts. The first and second deal with insurance of the works for new build projects and are quite straightforward; either the contractor or the employer takes responsibility for insuring the works. These different positions, known as JCT Options A & B respectively, are well understood and provided for on a regular basis in the industry.

The third route, Option C, intended for works in or extensions to existing structures is more complex. This option provides that the employer arranges insurance on behalf of the contractor for the following risks:

  • Damage to the works against “all risks” – this can be a misleading term as, naturally, it does not cover for all risks!
  • Damage to the existing structure and its contents for “specified perils” – the terms “all risks” and “specified perils” are defined in the contracts but the former is broader than the latter.

It is worth emphasising that all of these Options (A, B & C) create an obligation to insure up to the date of practical completion.

There are a number of reasons why this solution was chosen by JCT and we have summarised the key factors below:

  • It is inequitable for a contractor, typically working to very slim margins, to carry the increased risk of damage to the existing structure and contents. The risk of negligent damage may be covered under its third party liability (TPL) insurance, but there will be an excess (or perhaps some other form of self-insurance), possibly uninsured costs and, if there is a significant claim, the prospect of increased premiums in future years. Importantly, the value of existing structures may exceed the level of insurance available to the Contractor.
  • In the event of damage to the works and the existing structure, there could be a very difficult practical challenge in determining which policy responds and to what extent. This problem can be overcome by the employer insuring the works and existing structure with the same insurer or, even better, under the same policy.

So What’s the Problem?

There are a number of issues that can arise. For example, the employer under the building contract is frequently a tenant in the building in which the works are being carried out and not the landlord. As a result the employer may have no influence or control over the insurance policy for the building. The landlord or his insurers may object to the inclusion of the contractor under the property policy (even for specified perils only) and this will make Option C an inappropriate solution.

Alternatively, it is always possible that the employer is the building owner and for whatever reason he or his insurer may have similar objections to those described in the first scenario above.

JCT’s New Solution

This is not a new conundrum for those involved in the industry and for some time it has been recognised in JCT contracts which include constant reminders that the parties should take independent insurance advice before signing their contracts.

In the JCT 2016 Standard Building Contract (SBC) however, JCT has gone one step further than in previous editions by introducing a new option referred to as the “C.1 Replacement Schedule”. This provides that the parties and their advisors draft a bespoke insurance schedule which reflects the approach taken on the project and its specific circumstances. We are starting to see replacement schedules drawn up under JCT SBC 2016 but it is still early days and time will tell how the replacement option is put to use on projects.

In the meantime we have included some ways in which the existing clauses have been modified as an alternative to drafting a full replacement schedule.

1. Contractor to Provide TPL Insurance

Insurance of the works could be provided through adoption of either Option A or B (see above) and rely upon the contractor’s TPL insurance for losses arising from negligence as per existing clause 6.4. Of course, this may be unacceptable to the contractor given the increased risk under its TPL programme. In addition, this could leave the employer vulnerable to claims for damage to the existing structure (and contents) not attributable to the contractor’s negligence. Not forgetting that the employer may not be the building owner, this may require a more extensive TPL policy for the employer or perhaps some form of revision to the property damage indemnity provision in clause 6.2.

A variation of this solution involves the contractor taking out a project specific policy so that the impact of any adverse claims can be ring-fenced away from the annual policy. This arrangement can also be extended to cover any potential liability of the employer.

A further variation includes the contractor agreeing to take this risk under its TPL insurance (either annual or project specific) but only to a pre-agreed limit. Losses in excess of this limit would remain the responsibility of the employer, the landlord or the insurer. The limit would need to reflect the specific circumstances but there would be little difficulty in procuring specific TPL insurance on this basis to a limit of, say £10,000,000.

Where reliance is being placed on Public Liability insurance, care must be taken to ensure that such policies do not contain ‘care custody or control’ exclusions that would exclude damage to the existing structures.

2. Contractor to Provide Existing Structure Insurance

This is an unusual solution which normally only occurs in very specific circumstances. The reasons why this is not acceptable really mirror the concerns that the employer or building owner may have about insuring the contractor under the building insurance. In cases where the contractor is providing insurance via its annual construction all risks (CAR) programme there may be legitimate concerns raised by the insurer about the nature of the risk. After all, CAR insurance is intended to cover construction works and not completed buildings. The contractor may also have concerns over the impact of losses on future cover and premiums.

However, this can form a more realistic solution in cases where the contractor is procuring a project specific insurance policy for the project and the risk is ring-fenced away from the annual programme.

Where Do I Start?

These are complex issues that will require experience and expertise in this specialist sector. Always make sure you engage at an early stage with a specialist construction insurance broker who will be able to offer advice on practical solutions and support during the contract negotiations.