Is the insurance fit for purpose?

A middle ground that works for Landlords and Tenants

A new tenant is looking to fit the building out. The works will be carried out under a JCT contract which tends towards the employer arranging for the contractor to have joint insured status under the landlord’s property insurance. Contractors favour this approach because it removes the landlord’s insurer’s right to recover from the contractor if the building is damaged during the fit out, even if the damage results from the contractor’s negligence.

The historic response from insurance brokers, acting on behalf of the landlord, would be to deny the tenant’s request to make their contractor a co - insured on the landlord’s buildings insurance policy. The broker’s role being to act in the landlord’s best interests by safeguarding the landlord’s insurance programme from bearing the financial consequences of the acts of a careless or negligent contractor. Contractors would then have to rely on cover for any damage they were responsible for, being provided by their Public Liability (PL) policy. Where the value of the building demanded it, the contractor would buy more PL insurance and re-charge the additional cost to their client, the tenant.

Whilst there are some large landlords who remain insistent on saying ‘no’ to requests to make a contractor a co-insured, the balance of power in this discussion is increasingly favouring Tenants and their Contractors, making requests for co-insurance difficult to ignore. We believe the change in attitude has been driven by:

• A significant increase in the cost of PL insurance for contractors with the price per £1m of cover increasing from a low of £300 to as much as a £1000 per £1m of cover.
• Contractors, guided by their lawyers, becoming increasingly risk averse.
• Shortage of contractors forcing tenants to apply greater pressure on landlords to accede to contractors’ demands.
• Surplus supply of some asset classes encouraging landlords to accede to tenants’ requests to reduce void periods.

There is a middle ground for those landlords who remain understandably reluctant to grant co-insured status:

The contractor is not given joint insured status under the landlord’s property insurance programme but, instead, the landlord asks their insurers to agree that they will cap the contractor’s liability in relation to any damage caused to the building. The level of the cap will vary in accordance with the rebuild value for the asset with the cap determining the minimum limit of PL insurance the Contractor has to purchase. This helps to reduce risk to the landlords’ insurance programme (by allowing recovery against the contract for all but the very largest, and thankfully infrequent, losses) and reassures the contractor that their balance sheet is protected from a claim exceeding the limit of indemnity on their Public Liability insurance.

This is not a perfect solution but in the current climate, it is commercially realistic. However, not all landlords and/or their insurers will agree to this approach so do discuss the solution with your landlord client before suggesting this to a tenant.