Landlords and tenants are under growing pressure to deliver modern, attractive workplaces with a focus on wellbeing and sustainability. 

That may see building owners improving common parts or tenants planning major refreshes of tired and outmoded layouts.

But significant refurbishment projects can need as much thought and contractual care as any new build development project — sometimes more, because the works interface with existing structures, services and, potentially, occupiers.

One high impact risk is damage to the existing building and its contents during the refurbishment, where reinstating even a modest office building can cost many millions of pounds.

Indemnities, exclusions and the existing structures

How that risk is managed can be complex. That complexity partly arises because of the interaction between the indemnities and insurance provisions in the SBCC standard form contracts generally used for such projects.

These contracts include indemnities from the contractor to the employer. One indemnity covers negligently caused property damage arising out of the works. In broad terms, it says that if the loss occurs, the contractor is expected to cover it to the extent it is responsible (with contractors seeking to maintain public liability insurance against that risk). However, that indemnity is subject to several significant carve outs:

  • Refurbishment works - it excludes loss or damage to the refurbishment works themselves and site materials before completion (or any earlier termination of the contract or partial possession).
  • Existing structures and contents (where Insurance Option C applies) – it excludes loss or damage to the existing structures and their contents if those are to be insured under paragraph C.1 of Insurance Option C, where the loss or damage is caused by an insured risk (such as fire or escape of water, both common causes of damage during refurbishment).

Insurance Option C is therefore crucial. It requires the employer to put in place composite insurance (often referred to as “joint names” insurance) covering:

  • Existing structures and contents: a policy covering reinstatement of loss or damage caused by a Specified Peril (including fire and escape of water, two common causes of major refurbishment losses).
  • Refurbishment works: an “all risks” policy covering the works themselves and site materials.

The composite nature of these policies is vital. Under the principle of subrogation, if an insurer pays out, it may pursue any claim an insured has against a third party responsible for the loss. But if the contractor is joint or composite insured, the insurer generally cannot pursue it.

For example, if a fire caused by the contractor’s negligence damages the building whilst carrying out the refurbishment works, the insurer’s ability to claim against the contractor is, in principle, barred. The risk is intended to sit with the joint insurance, not a contractor indemnity claim.

However, if the standard Option C position is not adopted – it may be diluted by contract amendments or through the adoption of a “replacement C.1 schedule” – the contractor’s risk changes dramatically. The employer (or their insurer) may then be entitled to pursue the contractor for negligent damage to the existing structure and contents.

Contractors may assume they are protected by public liability insurance, but that may be inadequate. Reinstatement costs can exceed policy limits, and the cover may contain exclusions that apply in refurbishment settings, such as exclusions for property in the contractor’s care, custody or control.

Option C is becoming harder to achieve in practice

In our experience, achieving the ‘default’ Option C position is becoming more challenging. Reasons include the employer, building owner or their insurer wanting to maintain existing risk levels, or the employer being a tenant who does not insure the existing structure. In some cases, the building may not be insured at all, for example some public sector bodies self-insure.

This is an obvious issue for contractors, but it can also create problems for tenants and employers if the building contract suggests they are procuring the ‘default’ Option C position when they cannot.

Where the ‘default’ Option C position is not available, possible approaches include:

  • The contractor increasing its public liability cover to cover the reinstatement costs. If commercially achievable, the contractor is likely to pass any increased premium costs to the employer but will still face significant risk if coverage gaps remain.
  • Sharing the risk of damage to the existing structure. For example, the contractor may be liable up to its public liability limit, with the employer indemnifying it against losses above that limit. The employer may procure additional project-specific cover where available. If the employer is a tenant, the landlord may retain responsibility for very high value losses.

Key takeaways

  • For contractors: check the insurance option selected and any amendments. A standard Option C position can be fundamentally altered by a schedule of amendments.
  • Do not rely on assumptions about the insurance policy: the building contract must clearly allocate insurance responsibilities and address the risk of damage to the existing structure, even if a policy appears to provide for joint cover.
  • For tenants: speak to your landlord early about the proposed works and building insurance position. Be ready to be persuasive and assist the landlord with the information its insurers typically require (scope, programme, fire precautions, and contractor competence).

Managing insurance risk in refurbishment projects requires careful attention to how contracts allocate responsibility for damage to existing buildings and contents. As Option C becomes harder to secure in practice, contractors, tenants and employers all need to understand the potential exposure they face and take proactive steps to manage it.

Early engagement, clear contractual drafting and a realistic understanding of insurance gaps are essential to ensuring that refurbishment projects proceed smoothly and without unexpected financial risk.