Who will bear the risk? Professional liability crisis in construction

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Since the tragic events of Grenfell in 2017, the construction professional (PII) liability insurance market has grown more expensive with increasingly common exclusions of coverage. On November 29, 2018, the UK government announced details of its ban on the use of combustible materials in high-rise buildings. The burden of complying with all new regulatory requirements falls on consultants and contractors, but the risks associated with historical liabilities may fall on the insurer. This has led many insurers to exit the market. Those who are still active seek to limit their exposure, especially when it comes to fire safety claims.

The results published by the IUA in September 2021 from a cross-sector survey on PII restrictions show how concerned the insurance market is about underwriting fire safety. Many insurers fear that they will be subject to increased liability due to the general insurance conditions. As a result, a number of suppliers have completely left the construction industry. The Lloyds market has already demonstrated this with the withdrawal of several Lloyds Syndicates and specialist insurers from the IP market.

But is the PI construction climate simply the result of Grenfell?

Although the Grenfell tragedy contributed to the hardening of the market, a number of other factors also gave rise to a difficult PII climate. Carillion’s fall in January 2018 echoed existing fears in the insurance market that the construction industry was volatile. Lloyd’s 2020 Thematic Review found that there were several members who were not charging enough premiums to cover claims. Lloyd’s has asked its members to increase their premiums. This caused a ripple effect across the market, even insurers outside the Lloyd’s market revising their portfolios and adjusting their premiums accordingly. Add to that the recent uncertainty of Brexit and the effects yet to be felt from the global pandemic and it can be seen that market concerns extend far beyond fire safety risks. In addition, the reality of this tightening market is affecting an industry where the question of whether insurers would be able to recover money from the offending parties has always been a concern. Taken together, these issues pose a myriad of challenges for insurers seeking to assess risk and price it in a reasonable manner.

In July 2021, the 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 the potential exposure for claims made under the Act. While the overall intent of the Safe Buildings Bill is welcome and will lead to safer and better buildings in the future, this increase in exposure may lead to a market for l Insurance increasingly hardened, with potential defendants unable to obtain insurance coverage for such risks.

The results

Grenfell’s legacy, industry financial volatility and global financial uncertainty following recent events have prompted insurers to pull out of the industry. Those who stay are more selective, have increased bonuses, and in some cases exclude liability for certain aspects altogether. In addition to premium increases, it is not uncommon for insurers to apply the following punitive changes:

  1. coverage can change from an “all claims” basis to a comprehensive basis;
  2. modification of the policy deductible so that it applies to defense costs and is increased “per claim”;
  3. reduction of indemnity limits as insurers reduce their capacity;
  4. overall limits and exclusions with respect to fire safety claims.

The Construction Leadership Council survey released in March this year showed that nearly half of those surveyed in the industry had been turned down by 3 or more insurers. Marsh suggested that there had been a rise in premiums between 20% and 400% and that at least eight insurers would no longer offer PII to the UK construction industry.

The IUA suggested that while insurance is still available to industry, a more selective selection process is now required. Michael Atwell, chair of the IUA’s Professional Construction Lines Working Group, said those looking for coverage will need to do more to demonstrate the lessons learned from Grenfell. The forensic approach currently taken for PII insurance, with defined restrictions and aggregate coverage limits added, demonstrates that insurers have seized the opportunity to expand restrictions to cover well beyond combustible coatings and fire safety.

What can be done

Industry players should now carefully consider with their broker any likely exposure, whether future or historical, and should now be aware that purchasing initial coverage or renewing existing coverage can take significantly longer. than before, because due diligence is required.


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