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.
TL4 Fire Starters
Join us for a Festive FIRE Starters evening ahead of FIRE Starters Global Summit with our expert panellists.
Women in Chancery Christmas Celebration
Join us to celebrate the festive season and discuss the busy year we have had.
The Metro quotes Paul Stone on Elon Musk's feud with Apple over Twitter advertising
Musk feuds with Apple over Twitter advertising
Disclosing Third-Party Funding in International Arbitration: Where Are We Now?
What is third-party funding and what further developments can we expect in this fast-moving area?
Rose Carey quoted in The Evening Standard on visitor visa applications
“Family visas are currently taking up to six months to process and with no priority service available...”
Charles Russell Speechlys advises Guildford Games Developer Community on the launch of Guildford.Games Ltd
Charles Russell Speechlys has advised the Guildford.Games committee, a not-for-profit initiative, on the formation of Guildford.Games Ltd
Alexia Egger Castillo
Inheritance contracts: An unknown planning tool for Brits with assets in Switzerland?
How you choose to dispose of your estate after death requires careful consideration, especially where assets are in multiple jurisdictions
FT Ignites Europe quotes William Garner on the FCA's approach to founder-led firms
"Taking a very strict line on founder-led firms risks undermining the FCA's competition mandate..."
Paula Boast is interviewed by Construction Week on Bahrain's construction industry and how it is moving towards more functional and responsible building
Dissecting Bahrain's construction practices
Construction News quotes David Savage on the slight rise in construction output in September
"It remains to be seen how the sector reacted in October amid the political turmoil"
How final is a Final Certificate?
A recent Scottish case grappled with the complexities of a smash and grab adjudication.
HR Magazine quotes Nick Hawkins on a pregnancy discrimination case and what companies need to be mindful of
Pregnant worker given parenting tips before sacking wins tribunal case
Court of Appeal decides defective notice to quit not saved by 'Mannai' principles
The Court of Appeal handed down judgment in the second appeal in O G Thomas Amaethyddiath v Turner & Ors  EWCA Civ 1446.
“Truss me, I quit!” - 5 Tips to Handle Unexpected Resignations and Post-employment Grievances
Read our guidance for employers on dealing with unexpected and “heat of the moment” resignations
Sarah Jane Boon
The Independent quotes Sarah Jane Boon on the 9.6% divorce increase in 2021
ONS statistics - Divorces in England and Wales: 2021
CDR – Essential Intelligence: The Belt and Road Initiative
Of the BRI nations situated within the Gulf, the UAE stands to be a leader and consolidate itself as the trade hub of the Middle East.
Jurisdictional Challenges in Arbitrations in Qatar
Exploring jurisdictional challenges in arbitrations within the State of Qatar, both under Qatar law and the law of the QFC.
Non-payment: What’s a Contractor to do?
Payments to contractors are widely subjected to extensive delays.
JCT v NEC: Which contract is right for your project?
Unsure of what building contact to use. Learn the difference between NEC and JCT contracts with our guide.
South China Morning Post quotes Simon Green on Hong Kong investment into UK property
“With the increase in energy prices in 2022, this will be something for buyers and homeowners to consider.”