Demystifying JCT Insurance Options

Insurance provisions in construction contracts play a vital role in protecting parties against different types of risk. Although the insurance provisions within the JCT suite of contracts have generally been the same for a considerable period of time, it seems JCT insurance provisions continue to be misunderstood.

This blog focusses on the insurance options under the JCT suite of contracts for the works and the existing building.

JCT Insurance Options

Generally, the standard insurance options within a JCT contract – such as the Design & Build 2016 – are:

• Option A: the Contractor is required to take out and maintain a Joint Names Policy for all risks insurance for the works;
• Option B: the Employer is required to take out and maintain a Joint Names Policy for all risks insurance for the works; or
• Option C: the Employer is required to take out and maintain (a) a Joint Names Policy in respect of the existing structures and their contents, and (b) a Joint Names Policy for all risks insurance for the works.

Insurance Options A or B are intended to be used where the works comprise the erection of a new building. Insurance Option C is suitable (and is the only standard option) for refurbishment or remediation projects to an existing building.

It appears the confusion comes from JCT’s use of the term “Joint Names Policy”, with many believing this requires the Employer and Contractor to be “joint insured”. However, the JCT contract defines “Joint Names Policy” as:

“a policy of insurance 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 … recognised as an insured thereunder.”

What is the difference between composite insurance and joint insurance?

Joint Insurance:

A joint insurance policy is desirable where two or more parties with individual interests in a property need a single insurance policy. For example, where a property is owned by joint tenants. Under a joint insured policy the interests of all parties are treated as one under a single contract of insurance. Thus, where one insured commits an act that breaches the policy, such a breach will invalidate the policy for all insured parties, and therefore even a “innocent” joint insured party will be precluded from making a claim. Thus, where a Contractor and Employer are joint insured, if the Contractor commits a fraudulent act that would breach the policy’s provisions, then neither the Contractor nor the Employer would be unable to claim under the policy.

Composite Insurance:

In contrast, composite insurance is appropriate where two or more parties have separate interests in a property for example a borrower and a lender. Under a composite policy each insured party named in the policy has its own interest in the same policy, and importantly one party’s actions will not invalidate the policy for the other party. In construction projects it is important for the Employer to be able to make a claim in the event the works are damaged even if the Contractor commits an invalidating act.

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Too often, insurance is not fully considered on a construction project, nor the JCT provisions correctly understood. Yet if there are difficulties with arranging the required insurance, this can cause delays to commencement of the works. Early engagement with solicitors and specialist construction insurance brokers can streamline the process and ensure that the relevant policies on appropriate terms are put on risk, and the correct insurance provisions implemented from the outset.

In our experience it is increasingly common for Employers to face challenges obtaining composite insurance with the Contractor included as an insured under a buildings insurance policy as required by the standard JCT provisions, particularly for building safety/cladding remediation projects, seemingly because insurers wish to retain their rights to pursue the Contractor for any loss related to the existing structure.

In these circumstances, careful consideration needs to be given to possible workarounds such as bespoke drafting through a schedule of amendments and/or the inclusion of a C.1 Replacement Schedule. Given the implications of an Employer being in breach of its insurance obligations under a building contract, it is imperative for parties to seek professional advice at the outset of a project to avoid any delays in commencement of the works, be aware of and manage additional costs, and ensure that any insurance requirements set out in the building contract are capable of being put in place (and are actually put in place) as required by the building contract.

If you have any questions about the insurance provisions under JCT contracts or require assistance with drafting your building contract, please contact our Construction Team.

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