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A perfect storm for construction professional indemnity insurance

The tragic events at Grenfell Tower in June 2017 have further impacted upon the availability of Professional Indemnity (PI) Insurance in an already difficult market.

The UK construction PI market has deteriorated over the last 12 months and continues to do so. Following a ‘Thematic Review’ by Lloyds of London in 2018 many loss-making syndicates have been forcibly put into run-off, and others have had their capacity reduced. In the last 12 months Aspen, Brit, Hamilton Syndicate 3334, Novae and most recently Pioneer Syndicate have withdrawn from the UK PI market entirely and several others have withdrawn from underwriting ‘design and construct’ and construction PI. As a result most insurers that maintain any appetite for this sector are quoting increased premiums, higher excesses and limiting their exposure through restricted policy coverage.

Written by Paul Brown on 26th June 2019

A perfect storm for construction professional indemnity insurance

The tragic events at Grenfell Tower in June 2017 have further impacted upon the availability of Professional Indemnity (PI) Insurance in an already difficult market.

The UK construction PI market has deteriorated over the last 12 months and continues to do so. Following a ‘Thematic Review’ by Lloyds of London in 2018 many loss-making syndicates have been forcibly put into run-off, and others have had their capacity reduced.  In the last 12 months Aspen, Brit, Hamilton Syndicate 3334, Novae and most recently Pioneer Syndicate have withdrawn from the UK PI market entirely and several others have withdrawn from underwriting ‘design and construct’ and construction PI. As a result most insurers that maintain any appetite for this sector are quoting increased premiums, higher excesses and limiting their exposure through restricted policy coverage.

In response to the Grenfell Tower incident, last year the UK Government announced a ban on the use of combustible materials on new buildings over 18 metres containing flats, as well as new hospitals, residential care premises, dormitories in boarding schools and student accommodation over 18 metres. The new legislation came into effect on 21st December 2018, and is being implemented through changes to Building Regulations.

 

 


As a result, professional services firms like architects, engineers, surveyors and contractors have seen some form of ‘cladding’ coverage restriction becoming increasingly standard when they renew their PI policies and some have found ‘cladding’ cover excluded altogether.

Whilst the ban majored on buildings over 18 metres in height, the concerns of some PI Underwriters moved on from just tall residential buildings, featuring Aluminium Composite Material (ACM) panels, to all combustible materials on a wider range of buildings.  Of particular concern is the fact that for some PI Insurers the definition of "cladding" seems to now incorporate elements of fire safety.   ‘Cladding’ coverage restrictions are increasingly applicable to buildings above and below 18 metres in height and any situations relating to fire safety.

‘Cladding’ restrictions will also now typically restrict the limit of indemnity available to a single aggregate amount, including all defence costs, per policy period. They will usually introduce a higher level of self-insured excess for ‘cladding’ claims often also applicable to defence costs. We are seeing cover being restricted to a ‘rectification only’ basis, so there would be no cover for any consequential losses beyond the rectification work and the insuring clause is often weakened to a negligence basis only.

All of these cover restrictions and higher levels of excess can leave companies with increasingly exposed balance sheets.

So What Can Be Done?

You need to be engage with your PI Insurance Broker as and when necessary to determine whether or not you have any potential ‘cladding’ claims or claim circumstances that need to be notified to Insurers on a precautionary basis. The renewal process is likely to benefit from more detail and take much longer given current market conditions and early engagement with your Insurance Broker is crucial to secure the best renewal terms available for your PI renewal, especially if you have a potential ‘cladding’ exposure.

The additional detail should identify any potential ‘cladding’ exposures such as where firms have had any responsibility for the design, specification, installation of ACM, or equivalent combustible materials, or where they have supervised/inspected others doing so especially in relation to buildings over 18 metres tall.

Firms should be thinking about current projects and their approach to future projects. They should have a suitable risk-focussed process ready to provide to their Insurers which might include:

· Are you comfortable that you are only undertaking duties that are within your capabilities?

· Are you accurately recording such work?

· Are your internal procedures and protocols sufficiently robust?

· Are you comfortable with the performance and systems of any specialist sub-contractors that you are engaging for such work?

· Are you comfortable with the extent of the PI cover that any specialist sub-contractors hold – specifically in relation to ‘cladding’?

· Can you insist upon direct contractual links between fire / cladding specialists and the client?

· Clarity around your specific roles and responsibilities in contract including roles for which you are not responsible.

· Consideration of the exposures created by signing up to wide indemnity clauses, in contract, which could result in you indemnifying your client for all manner of losses, liabilities, damages or costs, many of which could be excluded by your PI Policy, even when you have not been negligent or at fault.

The current PI Insurance market and the focus on ‘cladding’ mean that it may not be possible to protect your firm as you would like, but putting your house in order and early engagement ahead of renewal will help improve your prospects of obtaining the widest cover at a reasonable price.

Speak to Franklands on 01332 545720.

Source: https://www.gov.uk/government/news/government-bans-combustible-materials-on-high-rise-homes

 

 

 

 

 

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