Where a tenant proposes to carry out fit-out works on a leased premises, it is crucial that the tenant seek specialist insurance advice before carrying out those fit-out works.
Failure to do so could result in a tenant inadvertently exposing themselves to enormous uninsured risk.
In the most commonly used form of construction contract for fit-out works in Ireland, the default position requires a tenant to:
- insure the existing structure of the building (i.e. elements of the building not being built, which in a fit-out scenario is often the shell and core); and
- obtain a waiver of subrogation in respect of this insurance in favour of the tenant’s contractors and sub-contractors carrying out the fit-out works.
The crucial issue, however, is that tenants often do not obtain the required waiver of subrogation. Either they are unaware of the requirement or, as a tenant, they may not be the insurers of the building, and the landlord may not provide such a waiver.
Waiver of subrogation?
A waiver of subrogation means the insurer cannot sue the party responsible for the loss. Taking the example of a tenant and its contractor, having this waiver in place means that if the existing structure of the building is damaged during fit-out works, the tenant’s (or the landlord’s, as the case may be) insurer would be prevented from pursuing the contractor to recover the losses suffered in connection with that damage.
A practical benefit of the waiver of subrogation is that the contractor does not have to carry public liability insurance for the total value of the building being fitted out. It would probably be considered unreasonable to require the contractor to hold insurance for the total value of the building being fitted out, which could be many multiples of the value of the fit-out works.
No waiver of subrogation? Tenant beware
If a tenant fails to procure a waiver of subrogation where one is required under the construction contract, they may expose themselves to significant uninsured risk. This is an often-overlooked issue.
For example, a tenant engages a contractor under a construction contract that requires the tenant both to insure the existing structures and to procure a waiver of subrogation in favour of the tenant’s contractor in relation to that insurance. The tenant takes out insurance to cover the existing structures but fails to procure the required waiver of subrogation, and the existing structures are damaged during the fit-out works.
In this scenario, the insurer of the existing structures may attempt to sue the tenant’s contractor for the damage caused to the existing structures. The tenant’s contractor may then counter-sue the tenant for all losses suffered since they resulted directly from the tenant’s failure to procure the required waiver of subrogation in favour of the tenant’s contractor in breach of the construction contract.
The tenant may be exposed to an uninsured risk up to the total value of the existing structures, even though the tenant put the relevant insurance in place. For this reason, a tenant should always seek specialist insurance advice before carrying out fit-out works.
Contributed by Conor Hurley