Who will carry the risk? Professional indemnity crisis in construction
Since the tragic events of Grenfell in 2017, the construction professional indemnity insurance (PII) market has become increasingly expensive with exclusions of cover becoming commonplace. On 29th November 2018 the UK government announced details of its ban on the use of combustible materials on high rise buildings. The burden of complying with all the new regulatory requirements lies with consultants and contractors but the risks associated with historic liabilities may lie with the insurer. This has resulted in many insurance providers exiting the market. Those that are still active are looking to limit their exposure, particularly in relation to fire safety claims.
Results published by the IUA in September 2021 from a pan-industry survey into PII restrictions show just how concerned the insurance market is about underwriting fire safety. Many insurers are concerned that they will be subject to increased liability due to broad insurance terms. Consequently, a number of providers have left the construction sector altogether. The Lloyds market has already demonstrated this with several Lloyds Syndicates and specialist insurers withdrawing from the PI market.
But is the PI construction climate just a result of Grenfell?
Although the Grenfell tragedy has contributed to the hardening market, a number of other factors have also given rise to a challenging PII climate. The fall of Carillion in January 2018 echoed existing fears in the insurance market that the construction industry was volatile. The Lloyd’s Thematic Review of 2020 established there were several members that were not charging enough premium to cover claims. Lloyd’s mandated that their members needed to increase their premiums. This caused a ripple effect across the market, with even insurers outside Lloyd’s market reviewing their portfolios and adjusting their premiums accordingly. Add to this the recent uncertainty of Brexit and the yet to be felt effects of the global pandemic and one can see that the market concerns extend far beyond fire safety risks. Moreover, the reality of this hardening market is falling on top of an industry where the question of whether insurers would be able to recover money from the parties at fault has always been a concern. When taken together, these issues provide a myriad of problems for insurers looking to evaluate the risk and price it sensibly.
In July 2021 the draft Building Safety Bill introduced an intention to retrospectively increase the limitation period for claims under the Defective Premises Act 1972 (the Act) from 6 to 15 years. The result is that when introduced, there will be an automatic increase in potential exposure for claims brought under the Act. Whilst the overall intention of the Building Safety Bill is welcomed and will bring about safer and better buildings in the future, this increase in exposure may lead to an ever more hardened insurance market with potential defendants not able to obtain insurance cover for such risks.
The legacy of Grenfell, the financial volatility of the industry and global financial uncertainty in the wake of recent events have caused insurers to retreat from the industry. Those who do remain are more selective, have increased premiums and in some cases excluded liability for certain aspects altogether. In addition to premium increases, it is not unusual for insurers to apply the following punitive amendments:
- cover may change from “any one claim” basis to aggregate;
- change to the policy excess so that it applies to defence costs and is increased on a ‘per claim basis’;
- reduction of indemnity limits as insurers are lowering their capacity;
- aggregate limits and exclusions in regards to fire safety claims.
The Construction Leadership Council survey published in March this year showed that nearly half of respondents within the industry had been turned away by 3 insurers or more. Marsh have suggested that there has been an increase of premiums between 20% and 400% and that at least eight insurers will no longer offer PII to the UK construction industry.
The IUA have suggested that, whilst insurance is still available for the industry, a more selective screening process is now required. Michael Atwell, Chair of the IUA’s Construction Professional Lines Working Group, has said that those looking for cover will have to do more to demonstrate the lessons learnt from Grenfell. The forensic approach now being taken to PII insurance, with restrictions being carved out and aggregated cover limits being added in, demonstrates that insurers have taken the opportunity to extend the restrictions to cover far beyond combustible cladding and fire safety.
What can be done
Those within the industry now need to consider carefully with their broker any likely exposure, be it future or historical, and must now be aware that taking out initial cover or renewing existing cover could take much longer than before as more due diligence is required.