Consultants and contractors on construction projects are having significant problems obtaining adequate professional indemnity insurance to cover incidents associated with building safety, such as fire safety and cladding. What are the current challenges?

1. A difficult market

A survey carried out in March 2021 by the Construction Leadership Council ‘pointed to widespread incidence of companies having to change the type of work they do because of restrictions on cover, with a quarter losing jobs because of tough conditions and limitations being placed on them by insurance firms. Even though two thirds of respondents said that less than 5% of what they do is high rise residential, almost one in three were unable to buy the cover they wanted or needed’.

On a regular basis, we are seeing both contractors and consultants struggling to obtain PI cover at the level and basis required. In some cases, the restrictions are being accepted by employers and, in others, contractors and consultants are having to omit scope from their work/services to reflect the insurance conditions, particularly in regard to fire safety and cladding. With ongoing building safety reform across the UK, it is likely that this challenging market will continue.

The issues with insurance don’t just impact new projects. Consultants and contractors are also struggling to renew their policies in line with what is required of them under existing contracts.

In our experience, it is common for contracts to contain an obligation on the consultant/contractor to notify the employer in the event insurance is no longer available. This point was highlighted in the recent Professional Indemnity Insurance Practice Note published by RIBA which recommends that existing contracts are checked to identify specific notification requirements. The Practice Note provides advice in relation to communicating with insurance brokers, record keeping, robust quality management systems and risk management.

2. New Exclusions/Limitations

If insurance can be obtained, exclusions or limitations, particularly in relation to fire safety and cladding are becoming common.

Most construction agreements will require a consultant/contractor to maintain PI cover for a set level on a set basis for typically a period of 6 or 12 years from practical completion of the services/works. We are now seeing notifications coming through that the specified level and/or basis of cover in a contract is no longer achievable, particularly in the case of cover in respect of fire safety and cladding. Each and every cover appears to be difficult to get and annual aggregate policies are being offered in the alternative so more attention is being paid to the details of any aggregate cover and, for example, any automatic reinstatements that may apply.

It should also be noted that contracts often include a caveat to the obligation to maintain insurance so that this only applies so far as the insurance is available at commercially reasonable rates and terms. This can be helpful to have from a contractor/consultant perspective, especially in the current market.  Employers need to interrogate the impact of this caveat carefully. They should ensure that substantiation is provided from brokers and that they fully understand the consequences on their development.

3. Premium Increases

Following Grenfell, insurers saw a large increase in notifications of potential claims due to defective cladding, which caused insurance premiums to rise. Other challenges facing the insurance market, including the reduction in the availability of appropriate policies, has also contributed to an increase in premiums.

In our experience, this is being managed in different ways in the industry. Contractors and consultants are sometimes absorbing the cost of these increases, whilst in other cases, a split of the increased cost is being agreed between the parties. We are also seeing higher premiums forming part of the ‘commercially reasonable rates’ debate mentioned above and being used as a reason that a specified level or basis of cover in an existing contract cannot be maintained.

4. Uninsured Risk

Another issue that we are seeing is uninsured risk. In instances where latent defects arise, particularly in the case of fire safety and cladding, it is now more likely that employers could find themselves in a position where (despite what their contract says) there is no insurance cover in place in to cover those defects. This is a significant issue and could greatly increase the risk profile associated with certain projects.

The key point is who bears the risk of subsequent problems with building safety and the costs of fixing any such problems which could be substantial.

It should be the responsibility of the insured to ensure that the cover they have is sufficient to meet the requirements of any insurance terms and to cover the risks associated with their scope. However, if that’s not the case, or the insured fails in this regard, the employer is likely to be exposed to uninsured risk. If the contractor/consultant is not of sufficient covenant to recompense the employer for its losses, it will be the employer who bears the brunt of any uninsured loss.

Employers should put in place suitable contractual protection and risk management processes to guard against this and insist on having sight of relevant insurance policies on a regular basis.

How should we respond?

In practice, all of the issues raised above converge. Building safety is on everyone’s minds and conversations about insurance are now increasingly common. That will not change. In fact, insurance is now likely to be at the forefront of risk analysis and management when negotiating a construction contract. If you want to start a conversation with us on the subject, please do not hesitate to get in touch.