Rising professional indemnity insurance premiums and restrictions on cover are preventing construction companies from taking on projects, and could delay work to improve the safety of buildings post-Grenfell, an industry survey has revealed.
The issue is creating a “two-tier system” where only those firms prepared to procure appropriate PI cover can undertake higher-risk projects.
The Construction Leadership Council survey results indicate that PI insurance premiums increased almost four-fold at the last renewal, having doubled the year before. Meanwhile, a quarter of respondents reported losing work due to inadequate PI cover. A similar proportion have changed the nature of their work due to strict conditions and limitations placed on them by insurance firms.
Even though high rise residential work makes up less than 5% of the work of two-thirds of firms surveyed, almost one in three could not buy the cover they needed in the wake of the Grenfell Tower fire. In addition, over 60% of survey respondents have some form of restriction on cover relating to cladding or fire safety, while one in three have a total exclusion in place for cladding claims and one in five for fire claims.
The survey results back up issues we are now seeing in practice due to a hardening of the professional indemnity market. The impact of this shift is likely to be disproportionately felt by SMEs, which are less able to shoulder the burden of increased premiums and are often reliant on the ability to accept a variety of work. We are starting to see, in effect, a two-tier system, where only those able and prepared to procure appropriate PI cover can take on work on higher risk projects. The forces of supply and demand then give those contractors and consultants a stronger bargaining position in commercial negotiations.
An interesting point I noted from the survey is that one-third of respondents report that they could not do remedial work to external cladding systems even if they wanted to, due to insurance constraints. This will undoubtedly impact the pace at which remediation can happen, lead to increased costs, and could make out of court settlements on liability more difficult to achieve.
A majority of respondents to the CLC survey said they buy cover for £10M or less, with very few buying over £30M. Almost half said they had been declined insurance by three insurers or more, while two-thirdscarry a claim excess imposed upon them by their insurers.
Difficulties in obtaining PI cover have implications for projects completed during previous insurance periods as well as current schemes because PI insurance operates on a “claims made” basis.
Contractors and consultants are typically obliged to maintain insurance cover at the same level in placewhen they delivered the work. This must be the case for the duration of the limitation period in which claims can be brought. Any failure to do that could be a breach of contract and could mean that a future claim is not backed by adequate insurance. The excess liabilityrequired in these instances might well push smaller contractors or consultants to the wall.
We are already seeing how difficulties arising from PI coverage limitations stifle the construction sector’s ability to react nimbly to new needs and opportunities, which could have a detrimental impact on the Government’s Build Back Better aspirations.
Commenting on the survey findings, the CLC’s PI insurance group chair Samantha Peat of Wren Managers, said she was extremely worried by the extent of the industry’s PI insurance problems and pledged to work with the government and industry to identify solutions:
“The cost increases, exclusions and claim excesses that companies are having to bear – even those that do not even work in high rise residential – could make it unsustainable for them to stay in business,” she warned.
“The survey results suggest firms will not be able to afford premiums and claim excesses, and they face the choice of refusing some work or undertaking projects for clients with inadequate insurance cover.”
There are no obvious solutions, but – given that the dynamics of the PI market are driven by insurers’ appetites for risk – there might be value in encouraging a more nuanced assessment of the business models of insured consultants and contractors, particularly the two thirds for whom less than five per cent of work is high risk. If the current constraints persist, that might lead to more fundamental changes in the way work is allocated, including, for instance, by renewed emphasis on alternative models, such as the integrated project insurance route.