The question of insurance is often a reoccurring issue when it comes to the procurement of fit-out works to a premises that forms part of a larger multi-let building.

Tenants need to consider insurance for the existing building and insurance for the fit-out works.

Whilst the agreement for lease or license to alter enables the fit-out works to be carried out by the tenant, the clauses which stipulate the insurance arrangements do not often reflect the practicalities of what and who needs to be insured.

Therefore, it is crucial that the landlord, the tenant and the fit-out contractor carefully address the issue of insurance as early as possible to ensure sufficient time for everyone to reach an agreement and put the necessary insurance in place.

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The key issues

It is the usual position that the landlord insures the multi-let building.

Should parts of the existing structure of the building become damaged during the undertaking of fit-out works by a flood or fire, for example, the reinstatement costs can be extensive, particularly if the building in question is a high-value city skyscraper.

Such reinstatement costs can be significantly disproportionate to the value of the contractor's work for that particular job.

The fit-out contractor, therefore, needs to ensure that it has adequate protection in place to protect them from the risks associated with the existing structure of the building.

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What are the options?

The starting point from a legal position is that two or more parties cannot commence a claim where the same risk is insured under the same policy.

In this case, the insurers would be unable to exercise their subrogation rights, i.e., to bring a claim against one of the co-insured.

It is sensible, therefore, for the tenant to consider co-insurance.

Alternatively, the tenant may consider procuring a waiver of subrogation.

Both of these are considered in further detail below.

It is important to note that tenants should not consider taking out their own buildings reinstatement policy, as this would risk vitiating the landlord's own buildings insurance policy, thereby limiting the prospects of recovery for themselves and the landlord.

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"Co-insurance" means that the scope of the building's insurance policy is extended to cover the tenant and the fit-out contractor.

The co-insurance defence is favourable to tenants as it means that both the tenant and contractor are protected from structural risk to the building.

The co-insurance provisions within the contract between the parties stipulate the existence and extent of insurance cover available.

A recent case which discusses the co-insurance defence is FM Conway Ltd ("FM") v Rugby Football Union ("RFU") [2023] EWCA Civ 418.

In this case, the contractor's co-insurance defence failed, despite being insured under the project's co-insurance policy.

The Court of Appeal held that whilst FM was insured under the same policy as RFU, they were not insured for the same risk.

Landlords may be reluctant to add a tenant and their fit-out contractor to their buildings insurance policy as joint insured, due to the real risk of increasing premiums, both during the works and in the future.

A landlord will also want to protect their policies from claims to protect their risk profile.

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Waiver of subrogation

As an alternative to co-insurance, the landlord's insurer may agree to waive their subrogation rights in favour of the tenant and their contractor.

"Subrogation" essentially allows the insurer to step into the shoes of their insured, in this case, the landlord.

The insurer must still pay out but can take any rights of the insured and pursue a claim under them against a tenant and contractor.

A waiver of subrogation, therefore, means that the landlord's insurer will be precluded from pursuing a claim against the tenant or contractor.

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JCT position

Most refurbishment projects within the UK are undertaken using the JCT Design and Build Contract 2016.

The relevant insurance clause is 6.2, which states that the contractor is liable for and indemnifies the employer against loss or damage to property and (at least as a starting point) the existing structure.

In the case of co-insurance, JCT Option C will usually be applied.

In terms of the contractor's liability under clause 6.2, JCT Option C.1 means that the contractor's liability will not extend to loss or damage to the existing structure caused by the risks required to be insured under Option C.

If a waiver of subrogation can be procured in accordance with the lease or license to alter, JCT Option C.1 should be disapplied.

This means that the contractor's liability under clause 6.2 would extend to loss or damage to the existing structure of the building, but it would have the protection of the subrogation waiver, often subject to a cap.

The contractor must assume some liability for the existing structure, which they must insure under their public liability insurance.

Any liability to the existing structure due to the specified perils would then be capped to the amount of the public liability insurance.

The waiver of subrogation would then apply to claims over this cap.

This way, the building's insurer would cover the full loss for any damage to the existing structure, with the contractor's liability to it being limited to a level it can cover by its own insurance.

Any liability above the cap would be subject to the waiver.

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Public liability insurance

If co-insurance and waiver of subrogation are not available, the contractor needs to ensure that their public liability insurance policy will apply to any existing structure risk.

The contractor should therefore check that:

  • The existing structure is not excluded from the scope of cover; and
  • The amounts covered under the policy are sufficient to cover the costs of reinstating the building.

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Closing comments

In relation to fit-out works, insurance negotiations between tenants, landlords, insurance brokers, and their solicitors can often be prolonged and involve several parties, including insurers.

Therefore, tenants must engage landlords as early as possible to try and secure a mutually practical and convenient solution.

In the case of new leases, such discussions should ideally take place during the heads of terms stage of the lease negotiation to enable policies to be put in place in ample time before the works commence.

In a new lease scenario, landlords will likely be more open to agreeing to a convenient resolution for both parties.

However, landlords will be willing to engage in meaningful discussions to maintain their reputable landlord profile in the market, even in the case of existing leases.

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