Wrestling with the retrofit insurance challenge

When we advise on retrofit, or other building contracts involving refurbishment or repair and/or the extension of existing buildings, one of the key legal issues to wrestle with is the insurance provisions.  Where Scottish Building Contract precedents are used, the default assumption is that Option C “Joint Names Insurance by the Employer of Existing Structures and Works in or Extensions to them” applies.  As recognised by footnotes in the standard form, however, this is a complex issue, in relation to which detailed advice should be sought from specialist insurance and legal advisers.

What requirements apply under SBC standard forms (if not amended)?

Under Option C, the Employer is required to effect and maintain “Joint Names Policies” (until the date of issue of the Practical Completion Statement/Certificate):

• Paragraph C.1 – in respect of the Existing Structures and contents “for the full cost of reinstatement, repair, or replacement of loss or damage due to any of the “Specified Perils”; and
• Paragraph C.2 – for “All Risks Insurance” with cover “no less than that specified in clause 6.8” for the full reinstatement value of the Works (plus professional fees).

Joint Names Policy is defined as a policy which “includes the Employer and the Contractor as composite insured and under which the insurers have no right of recourse against any person named as an insured, or, pursuant to clause 6.9, recognised as an insured”.  Clause 6.9 requires that sub-contractors are either recognised as insureds or receive a waiver by insurers of rights of subrogation which they may have against sub-contractors.

Specified Perils include a list of risks covered by typical property reinstatement policies (including fire and escape of water), with a carve out for “Excepted Risks”.

All Risks Insurance is cover against physical loss or damage to work executed and Site Materials and against reasonable cost of removal and disposal of debris and shoring and propping of the Works resulting from such physical loss or damage but excluding certain identified categories of repair, replacement or rectification costs.

What issues may arise that make compliance difficult?

Some Employers under building contracts (and Government bodies/external agencies in particular) adopt “self-insurance” policies (i.e. may not have any policies in place for properties comprised within their estate).  In such cases, it is likely to prove impossible or at least very expensive for the Employer to secure a policy covering the Existing Structures complying with Paragraph C.1.  This would be a “one off” purchase/not as part of a wider portfolio and in relation to a property that will be at increased risk of being lost or damaged due to the intention to carry out potentially intrusive and disruptive works within the buildings.  As such the risks may well be unattractive to insurance underwriters.

For other Employers, their existing policies may not cover the full “Specified Perils” list and/or be underwritten in terms that makes it impossible to extend cover under them to the Contractor as a full “composite insured”.  Difficulty in securing waivers of subrogation rights relating to sub-contractors (as is required by clause 6.9) has also been a recurring issue.

In other projects, our clients have found it difficult to secure “Contractor’s All Risks” cover for the works elements of refurbishment/repair and extension projects that matches cover that is typically available to contractors (whose main business it is to undertake construction works).

What changes to standard form have we proposed to address the issue?

This issue requires careful consideration on a contract-by-contract basis (with clear supporting advice from insurance advisers relating to relevant policy terms).  We have, however, considered the following options in previous negotiations:

• Where the Employer does not have an insurance policy for the Existing Structures, and is unable to obtain one:
  • amending Paragraph C.1 to remove the Employer’s obligation to insure and disclosing to the Contractor that no policy will be in place
• altering clause 6.3.1 and deleting clause 6.3.1, so that the Contractor remains responsible for and is required to indemnify the Employer in respect of any loss or damage to Existing Structures caused by or arising from any negligent act or omission or breach of statutory duty or default by the Contractor and
• removing the Contractor’s right to terminate its appointment under clause 6.14 where the cause of loss or damage to the Existing Structures is a negligent act or omission or breach of statutory duty or default by the Contractor
• Where it is not possible for an existing Employer’s policy relating to the Existing Structures to provide full “Joint Names” cover, amending Paragraph C.1 so that waivers of subrogation rights by insurers in favour of the Contractor are granted instead.
• Altering the definition of “Specified Perils” to match risks actually insured under an existing Employer’s policy relating to the Existing Structures.
• In most projects, disapplying the requirements of clause 6.9 to any existing Employer’s policy relating to the Existing Structures (i.e. no waivers of subrogation rights to be obtained in respect of sub-contractors).
• Finally, in most projects, Paragraph C.2 has been amended so as to require the Contractor rather than the Employer to maintain the Joint Names Policy in respect of the Works.

It is worth carefully considering these issues at an early stage in the procurement of relevant projects as this will allow the detailed supporting advice required from specialist insurance advisers to be obtained.

This, and other housing topics, are being discussed this week as part of Harper Macleod’s National Housing Conference. For more information or to register for one of our webinars, visit https://www.harpermacleod.co.uk/events/nhc/