Tenant’s fit-out works: Is your insurance fit for purpose?

When a tenant intends to undertake fit-out works to a premises forming part of a larger, multi-let building, they need to address the insurance arrangements for both the operational existing structure and the fit-out works themselves. While the arrangements are often stipulated in the relevant property documents (for example, an agreement for lease or licence to alter), they do not always address the practical reality of what and who needs to be insured.

What insurance is required on fit-out projects?

The tenant may wish to utilise the JCT’s “Option C” insurance for their fit-out project. However, this may not always be appropriate for the specific fit-out scenario and may leave them exposed. The tenant must ensure that the drafting of the building contract gives effect to what has been agreed with the landlord and contractor. The relevant insurances to consider include:

• Construction All risks insurance covering physical damage to the fit-out works and any materials used for the project which is to be maintained until practical completion of the works.
• Buildings insurance covering physical loss or damage to the existing structure of the building;
• Public liability insurance for death or personal injury to third parties or physical damage caused to the third parties’ property.

Generally speaking, procuring all-risks coverage for the works in the joint names of the contractor and tenant (employer) presents no issues. The contractor will typically maintain public liability insurance to respond to claims by third parties who are not employees of the contractor. However, difficulties often arise in relation to the “reinstatement” policy covering costs of repair arising from damage to the building as a whole.

What are the issues?

A landlord will have already taken out buildings insurance, which means a tenant that takes out a reinstatement policy in relation to the same building risks vitiating one or both of these policies, and thereby limits the prospects of recovery for both themselves and the landlord. Indeed, a tenant is unlikely to possess the necessary information regarding valuations, methods of construction and the contents in other areas of the building to do so. A tenant may also not have an insurable interest in relation to the rest of the building, meaning either the required policy may not be available or it would not respond in full to the damage sustained. Further, the cost of a policy for a full reinstatement would likely be prohibitive to a tenant and disproportionate to the value of their works, in particular where the extent of the fit-out is one or two floors of the building.

What are the solutions?

The landlord could resolve this issue by extending the scope of their buildings insurance to name the tenant and contractor on the policy. However, landlords are increasingly reluctant to go down this route, either because of concerns around the resulting increase in premiums or the administrative burden involved. For the same reason, landlords are resisting any waiver of subrogation in favour of the tenant or fit-out contractor. The result of this is that when a tenant is carrying out works, they look to rely on the contractor’s insurance to cover and damage to the building (forming part of its own third-party liability policy). However, tenants must be cognisant that not all public liability policies will respond to the Specified Perils as defined in the JCT, and may not recognise the existing structure as qualifying “third party” property. Even in those cases where the policy does respond, it may not be for the full reinstatement value which again raises the issue of the tenant being underinsured or even uninsured.

Insurance for fit-out works merits early discussion between tenants, landlords and their respective insurance brokers and solicitors, where required, to ensure that policies can be put in place in good time before works commence and any necessary drafting agreed to reflect these policies. The parties should ideally look to agree a mutually convenient arrangement at the heads of term stage, as this will minimise the risk of coverage shortfalls for the tenant.