Tenants beware: Don’t let insurance issues slow down your fit-out

A commonly overlooked issue for tenants of multi-let buildings is the practical reality of who is responsible for insuring against damage to the building when the tenant is undertaking alterations.

Standard construction contracts protect the contractor from a claim against damage to the building by providing terms that the employer maintains building insurance in joint names of the contractor and employer for certain significant events known as ‘specific perils’. Where the employer owns or controls the whole building for which the contractor is to carry out works to the existing structure, the matter is straightforward enough.

When it comes to tenants of multi-let buildings, it is more complex. For a multi-let building, the landlord would normally take responsibility for the building’s insurance policy, leaving the tenant, as the employer of the contractor, unable to fulfil this requirement.

Landlords can extend the scope of their policies to name the tenant and contractor on the policy for the duration of the works, however, they are more and more reluctant to do so given the administrative burden involved and the potential for premiums to be adversely affected by a contractor’s claim. This then leaves the matter of who is responsible for insuring against the fit-out works grey.

Some contractors are now tendering based on a public liability policy with an adequate level of indemnity to cover re-instatement of the building. Whilst this may provide some level of comfort, tenants should be mindful that each policy is different and may not cover all risks. What’s more, where risks are covered it may not be for the full reinstatement value. Unfortunately, this potential insurance gap is regularly a mere after thought and often flagged when it’s too late. In the absolute worst case, if a fit-out starts and something happens, there’s no insurance to protect the tenant. 

Being underinsured or even uninsured is never good news for a tenant when it comes to fit out works – the obvious risk being exposure to picking up the costs. If the position is not cemented at the outset, it also means that should any issues arise, the project will likely be delayed as parties try to figure out who is responsible for the cover and to what extent. The repercussions for the tenant are significant. They are unable to commence trading and generate income whilst fit-out works and insurance issues are underway.

Our commercial property expert Pam Gill shares this advice:

There are several ways we can help tenants to deal with this insurance gap, but the earlier the tenant addresses it, the better.

Negotiations with landlords, contractors and their insurers can slow a project dramatically, causing serious issues for a tenant whose primary goal is to get the building ready for them to trade.

We’d recommend that a tenant discusses insurance options for alterations with their landlord and proposed contractor at heads of terms stage. Finding a commercially sound solution adequately protecting the tenant can take time (and come at a cost which the tenant will need to budget for) when negotiating with landlords, contractors and their insurers. Dealing with the issue head on ensures that the tenant is protected from any potential claim and unnecessary delay.