Our latest JCT 2016 Edition blog looks at the insurance provisions in the Minor Works Building Contract…
The JCT Minor Works Building Contract (Minor Works) is designed for smaller, basic construction projects where the work is of a simple nature. Accordingly, the insurance provisions are shorter and simpler than those in contracts such as the JCT Design and Build Contract. However, it is still very important to carefully consider the insurance provisions contained in Section 5 of the contract and ensure that they meet the project requirements.
Section 5 provides for three types of insurance: public liability insurance, employer’s liability insurance and insurance of the Works (and potentially of existing structures). Public liability insurance covers the contractor’s liability arising from death or personal injury to third parties and their liability for damage to property. Employer’s liability insurance covers claims arising from injury or death to the contractor’s own workforce. Works insurance covers physical damage to the Works and site materials.
When insuring the Works, the Minor Works contract caters for three alternatives:
Clause 5.4A
Under clause 5.4A the contractor takes out Works insurance and each Party is covered under the policy as a ‘composite’ insured. This means that although it is the contractor who insures the Works, the employer is separately covered under the same policy in respect of their interest. Clause 5.4A insurance should be taken out where there are no existing structures (i.e., on ‘new builds’).
Clause 5.4B
Clause 5.4B provides for a different insurance arrangement and is for use where there are existing structures. For example, a Minor Works contract might be used by a tenant to carry out certain fit-out works on one floor of a building and part of the necessary insurance arrangements would involve ensuring that cover is in place in the event that a fire started due to the Works and destroyed not only the Works but the building as well.
Under clause 5.4B rather than the contractor insuring the Works, the employer arranges composite cover for the Works and for the existing structures. However, the insurance cover in respect of existing structures is not on an all-risks basis (like the Works insurance) but only applies to loss or damage due to a ‘Specified Peril’, for example, fire.
Clause 5.4C
Experience has shown that there can often be difficulties in arranging satisfactory joint cover in respect of existing structures under a policy held by the employer. Before the introduction of the 2016 suite, the Minor Works dealt with these difficulties by offering a third option (clause 5.4C) that envisaged two separate policies: the Employer taking out cover in its sole name in respect of existing structures (under clause 5.4C) and the Contractor insuring the Works (under clause 5.4A). However, this was potentially onerous for a Contractor because without existing structures cover they could end up being liable for damage occurring to those structures due to their negligence.
The significant amendments in the 2016 contract reflect JCT’s acknowledgement of these difficulties and their efforts to alleviate them by improving the flexibility of the provisions and giving the parties freedom to sort out their own bespoke insurance solution. In particular, JCT was aware that problems can occur where a homeowner finds the cost of obtaining appropriate cover prohibitive, or when the Works are being procured by a tenant and the insurance arrangements are more complex than the old clause 5.4C was able to cater for, for example, because it is the freeholder who is responsible for insuring the building or an intermediate lessor. As a result, the new clause 5.4C permits insurance of the Works and existing structures by “other means”.
If the parties want to insure by “other means” they must state this in the Contract Particulars by deleting options 5.4A and 5.4B and retaining the option that states “Clause 5.4C (Works and existing structures insurance by other means) applies”. They are also required to identify the documents containing the bespoke arrangements they have agreed upon. As the footnotes to this choice indicate, it is vital that if this option is being considered the parties should consult the employer’s insurance advisers prior to the tender stage. In addition, if the employer is a tenant whose landlord insures the structure they should also consult them prior to that stage.
The principle of giving greater flexibility to the parties in relation to their insurance arrangements is mirrored in the JCT 2016 Edition of contracts designed for larger projects, which also provide for alternative solutions through the concept of a “Replacement Schedule” which enables the parties to replace the options on offer within the contracts with their own bespoke arrangements. These changes have been widely welcomed within the industry as adopting a practical and sensible approach to a difficult issue.
There are a few other less significant changes to the insurance provisions, designed to simplify and clarify. It is worth noting that JCT has not provided for professional indemnity insurance, so if the contractor is carrying out any design the employer may wish to amend the standard form to cater for this.
Blog authors:
Ben Patton, Partner, Ashurst LLP; member, JCT Drafting Sub-Committee
Sadia McEvoy, Expertise, Ashurst LLP