Craig Johnson, Real Estate Leader, Manchester
As most people working in the industry will know, contract works are usually governed by standard form contracts known as JCTs – or Joint Contracts Tribunal contracts. In essence, these contracts, which can be bought as templates, set out the responsibilities and obligations of the parties involved in the works – employer, contractors, and any subcontractors.
JCTs tend to save time compared with drafting a contract from scratch, ensuring that any risk associated with the project is shared fairly, and sets out which parties are required to make insurance arrangements.1
With that in mind, it would be easy to assume that a construction project governed by a JCT should be covered by a ‘joint names’ extension within the contract works insurance policy, which reflects the responsibilities under contract for both the employer and the contractor.2
Complex contracts and construction insurance
However, construction is a complex business subject to many and varied risks – for instance those related to workmanship, design failure, or the construction process, as well as those related to the environment and the presence of employees from different firms on site. All can result in loss or damage and, ultimately legal liabilities.
What’s more, the parties to a construction project can extend well beyond those commissioning the work (the employer) and delivering it (the contractor). They can, for instance include architects, project managers (or main contractors), various subcontractors, suppliers and, via collateral warranties, future purchasers or tenants. Finally, and perhaps most importantly, construction contracts can also include funders and lenders, whose interest in the project will often differ from the other parties.3
This contractual complexity has knock-on effects for construction project insurance arrangements, since they must adequately cover the risks facing each party and the nature of their interest in the project. That is why is it always sensible to take expert advice before taking out insurance, to ensure the correct policy extension – joint names or composite insured – is in place before works begin.
In general, however, it is possible to set out in general terms the differences between the two – albeit recognising that the devil is in the detail, because no two projects will share the same risks.
What is joint names construction insurance?
Joint names is an insurance policy extension that accommodates the contractual responsibilities of the employer and the contractor. It applies to both new build and refurbishment or extension contracts where there is a requirement to name parties on a construction insurance policy covering the contract works and any existing structure.
The benefits of a joint names extension include the removal of any need for each party to take out separate policies covering their own responsibilities and therefore eliminate the risk of duplicated insurance arrangements. In addition, joint names ensures that the named parties – for instance the employer and contractor – cannot claim against one another, and makes it impossible to cancel the policy without notifying all named parties.2
In simple terms, this extension is most often appropriate when the contracted parties’ interests are aligned – for instance an employer and contractor’s interests are likely to be the completion of the works on time, on budget and to the agreed quality.
What is composite insured construction insurance?
Composite insured is another kind of insurance policy extension that is often applied when one or more parties to a construction contract have an individual interest in the works, but that is separate from the other parties. For instance, a funder or lender’s interest in a construction project is primarily the recovery of debt finance and interest, which will usually be contractually independent of the successful completion of the works. Meaning the lender will include provisions for debt recovery regardless of the financial outcome of the works.
A composite insured extension reflects this scenario by ensuring that a single contract works insurance policy can reflect the different interests of various parties. In particular, it can help to reassure lenders that their financial interest is properly protected – including first loss payee status, which means that, in the event of a total loss claim, the lender will receive settlement payment to cover their financial exposure.
In addition, composite insured extensions do not penalise lenders for any non-payment or negligence on the part of those arranging insurance – for instance the employer or contractor – and ensures the lender is informed in the event that any other party seeks to cancel insurance mid-term.
It is worth remembering that this is a very different arrangement to one based on a joint names extension that simply notes the lenders interest in a project. That is, noted interest will provide the lender with information on insurance arrangements – policy number, cover dates and so on – but does not protect its financial interest against negligence from the borrower. 2
In summary: The difference between joint named and composite insured
To summarise, both joint names and composite insured are insurance policy extensions applicable to projects governed by JCT contracts. However, joint names extensions are most commonly applicable where the insured parties have undivided interests in the project, while composite insured extensions are most applicable where one or more parties have their own interests, separate from the other parties.
As noted earlier, however, no two construction projects and contracts are the same, so seeking expert advice on the best way to share and insure against construction project risks is essential to making the right decisions. This will ensure that all parties are provided with adequate and appropriate protection.
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Craig Johnson, Real Estate Leader, Manchester
Craig Johnson has a wealth of experience supporting asset managers, developers, institutional funds, managing agents and property owners on their real estate and development insurance needs. Advising on real estate risks of all types from buildings insurance, to restrictive covenants and rights of light exposures.