Real World - May 2013: Mind the gap – insurance issues for tenant fit-out works

by Dechert LLP

Imagine the following scenario; your company has acquired a lease of a prime piece of real estate to accommodate its fast expanding business. The building’s footprint lies in the heart of the city’s commercial centre. The building is a glass facade, high-rise, multi-tenanted, swanky office block valued at multi-million pounds. Your fit-out contractor has produced sumptuous designs to complement your new environment and the only thing that remains between you and a smooth seamless transition to the new business home is finalising the fit-out contract. The JCT is usually the preferred standard form for these types of works, and parties eager to close the deal agree insurance Option C will apply for an existing structure. Everything is going smoothly until your fit-out contractor negligently causes a fire. The whole building is damaged and uninhabitable. Who pays for the damage? The contractor, right? Well, not quite and here’s why:

Under JCT Option C, the ‘employer’ takes out:

  1. ‘All risks’ insurance in joint names for the period of the works.
  2. Insurance relating to the whole of the building.

But, as a tenant of a multi-tenanted building, it is unlikely you will have an insurable interest in the whole of the building and so you will be unable to comply with (2) above. Even if you do have an insurable interest as a tenant, the cost of insuring the whole of the building may be disproportionate to the value of the works proposed. This creates a gap in insurance. There are a number of ways this gap can be mitigated:

A. Landlord’s Insurance

To comply with (2) above, you must ensure the landlord’s insurance policy is extended to cover the works.

The landlord will usually take out insurance over the entire property. A tenant, with no insurable interest in the remainder of the building, may have its interest noted on this policy, but this noting has little practical benefit. Under the building insurance, the insurer will have rights of subrogation, meaning they can pursue tenants, in place of the landlord, for breach of any licence for alterations in the event that a claim is made. A tenant should seek an express waiver of this right upon taking a tenancy.

In recent years, there has been much resistance from landlords and their insurers to extend such cover. If such extension cannot be obtained and JCT Option C is selected without making any further amendments, there is likely to be a gap in insurance and you may be in breach of your obligations by failing to insure the whole of the building.

B. JCT Option A

Whilst the JCT states Option A is for new build works, there is nothing precluding you from using this option for existing buildings, and in fact it may be a preferable option, as the contractor has responsibility for insuring the works. The option does not mention insurance of the building and the contractor will remain liable under the normal indemnity provisions in the contract. But you will need to satisfy yourself the contractor has sufficient insurance in place to meet all such liability in the event of a worst case scenario.

C. Contractor insurance

Under the building contract, a contractor is ordinarily required to maintain a public liability insurance policy (“PLP”) to protect itself against damage to third-party property as a result of the works. If using Option A, ensure the PLP is sufficient to cover liability for reinstatement of the building. Usually, such third party property may not include the parts of the building outside the tenant’s demise. Even if it does, the PLP may exclude certain expensive risks such as loss of profit or business interruption. Further, the PLP is likely to be capped. This cap may be woefully insufficient for large multi-let properties where reinstatement costs may reach hundreds of millions of pounds. Protecting against full reinstatement of such properties may be prohibitively expensive relative to the works undertaken.

Contractors are increasingly aware of the risks and gaps this will cause and are offering PLPs with adequate limits of indemnity to respond to claims arising from damage to the existing structure.


Ultimately, responsibility to insure will be determined through commercial negotiations between the tenant, contractor, landlord and landlord’s insurer.

The most cost-efficient approach for a tenant would be to:

  1. Use Option A as the basis of the works contract, holding the contractor, rather than the tenant, liable for damage caused by the works up to the limit of its PLP (provided that such PLP does not exclude damage to the landlord’s property not subject to the tenant’s occupation).
  2. Negotiate with the landlord and its insurer to get both the tenant and the contractor named on the landlord’s insurance policy for the period of the works. This insurance should be extended to cover any specified risks not covered under the PLP (such as loss of profit or business interruption).
  3. Share with the contractor the cost of any uplift in the premium for the landlord’s insurance in order to obtain (2) above.

As landlords are increasingly resisting such extensions, speak to your contractor. Some contractors have begun to procure insurance policies with high insurance caps, so that they can assume liability to help compete for work.

Insurance of works is an important issue that should be resolved at the earliest possible stage. Where the works lead to the destruction of the building, for example through fire or flood, the tenant could find itself subject to a multi-million pound claim from the landlord’s insurer (if rights of subrogation have not been waived). The tenant may, in turn, be able to pursue the contractor under an indemnity in the contract, but if there is a shortfall because the contractor’s PLP is capped, this could be very costly indeed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.