Building insurance requirements in construction contracts is an area where clients can become confused. This is particularly true under standard forms such as the JCT and NEC. In this article, we’ll examine the two main forms, and some common areas of confusion. 

 

A common assumption is that insurance costs will broadly reflect the value or scale of the works being carried out. However, insurance requirements are usually driven by contractual obligations rather than the physical risk presented by the project. This is especially true when it comes to minor alterations within larger buildings. 

 

Under JCT contracts, insurance provisions set out who is responsible for insuring the works and the existing building during construction. This is especially important on refurbishment or fit-out projects, where works are carried out inside an existing structure. 

 

Working in an existing building carries a higher risk. Damage to the structure or occupiers’ property can easily exceed the value of the construction works themselves. JCT insurance provisions are designed to balance risk fairly between the employer and the contractor. 

 

JCT uses three main insurance options: 

• Option A – New Build - the contractor insures the works 

• Option B – New Build - the employer insures the works 

• Option C – Works to Existing Building – The employer insures the works and existing structure 

 

Under this option C the employer typically has insurance for the existing structure and contents (usually under their buildings policy), and the works are insured up to completion. The requirement is for the contractor to be names as joint insured on both the existing structure and the works. This avoids the contractor carrying the full risk of damaging a high-value existing building. 

 

Option C does not always work smoothly especially when the employer is a tenant, with no control over the building insurance or landlords or insurers refusing to include contractors on the policy. In these situations, the standard JCT approach may not be achievable. 

 

What can be done instead? JCT 2016 allows the parties to agree a bespoke insurance schedule (known as Option C.1 replacement schedule). This is a customized alternative to standard insurance requirements for projects involving works to existing structures. Parties will often rely contractors on public liability insurance (often with agreed limits) to cover damage to the existing structure or use project-specific insurance to address the risk. 

 

Under the NEC Engineering and Construction Contract (ECC), insurance provisions explain who carries which risks during construction and what insurance each party must have in place. This applies to both NEC3 and NEC4 contracts. 

 

NEC does not use insurance “options” like JCT. Instead, risks and insurance responsibilities are clearly divided between the client and the contractor and set out in the contract at the start of the project. 

 

Unless stated otherwise the contractor usually maintains Contractor’s All Risks insurance for the works, public liability insurance for injury or property damage, and Employers’ liability insurance for its employees. 

 

The client can take out some of these insurances if this is agreed in the contract. Under NEC4, the Contractor may also be required to maintain professional indemnity insurance. 

 

The contractor only insures risks it is responsible for under the contract. Damage that is the client’s liability is not covered by the contractor’s insurance. 

 

Example: A contractor refurbishes part of a live building under an NEC contract. 

The Contract confirms who insures the works, and who insures the existing building. If damage occurs, responsibility is clear and disputes are reduced.¹ 

 

The key takeaway is that the insurances must dovetail with the contracts that are in place. Taking advice at the start allows parties to agree insurance arrangements that are practical and appropriate for your project. 

 

If you’re unsure or struggling with the risk allocation and insurance requirements of a project you are engaged on, get in touch with Rick, George or one of the team today. 

 

¹ https://www.lexisnexis.co.uk/legal/guidance/nec-contracts-insurance