“Hardening" Market for Professional Indemnity Insurance
Compelling evidence of the “hardening” of the professional indemnity insurance (PII) market post-Grenfell has been provided by a recent survey conducted by the Construction Leadership Council (CLC).
Significant cost increases and the introduction of new restrictions on PII are preventing companies from taking on projects and could delay essential work on building safety.
The CLC survey was carried out from mid-February to mid-March and covered 1066 responses from a mixture of consultants, contractors, and specialists. Respondents ranged in size, with half of the respondents being companies with an annual turnover of less than £2m and 10% of respondents having an annual turnover of over £50m.
Key findings of the survey include:
Over 60% of total survey respondents have some form of restriction on cover relating to cladding or fire safety.
One in three of the survey respondents have a total exclusion in place for cladding claims.
One in five respondents have a total exclusion in place for fire claims.
Over a quarter of the total survey respondents have lost jobs as a result of inadequate PII.
One in three respondents couldn’t do remedial work if they wanted to because of exclusions to their cover.
Almost a quarter of the total survey respondents have changed the nature of their work due to inadequate PII.
A majority of respondents buy £10m or less cover with very few buying over £20m.
Almost half of the respondents had been declined insurance by three insurers or more.
Two-thirds of respondents are carrying a claim excess imposed upon them by their insurers.
Premiums have increased nearly 4-fold at the last renewal, having doubled the year before; the average rate is 4% of turnover, but one in five who gave figures is paying more than 5% of their PI insurance turnover.
The results 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 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.
Although not covered directly by the survey, it is also apparent that many insured parties are facing difficulties in securing renewal of “any one claim” cover with “aggregate” cover being offered instead.
An “any one claim” policy provides cover up to the full limit for each individual claim made in the period of insurance, whereas an “aggregate” policy provides cover up to the full limit for all claims made in the period of insurance.
“The survey results confirm that there is a widespread problem for many firms in being unable to obtain essential PI cover, which is having an impact on the ability of the industry to work, and undermining efforts to deliver remedial work to ensure building safety.”
Andy Mitchell CBE, co-chair of the CLC
Samantha Peat, managing director, Wren Managers, and chair of the CLC PI Insurance Group, said that she was extremely worried by the extent of the PII problems and would be actively working 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.
“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.”
Increased PII premium costs will need to be met by contractors and consultants, but these are likely to be passed on to employers.
Typically, building contracts and consultant appointments contain a clause obliging the contractor and consultant to maintain PII cover at a defined level for a set period (usually 12 years for documents executed as a deed) provided that such cover is available on “commercially reasonable rates and terms.” If the contractually required level of cover is no longer available to the contractor or consultant, then breach of this obligation would (depending on the precise terms of the provision) potentially result. As PII is a “claims made” insurance, the key factor is the scope of insurance available when the claim is made, rather than when the contract is entered into, or the default occurs. This scenario could mean that any claim might not be backed by adequate insurance at the time that the claim is made, leaving a shortfall for the employer to be claimed against the assets of the contractor or consultant.
If the contractually required cover is still available in the market, but at a vastly increased premium cost and with exclusions to cover, then disputes may arise on the interpretation of “commercially reasonable rates and terms.” Often, building contracts and consultant appointments will contain provisions that oblige the contractor or consultant to notify the employer of such circumstances and to enter into dialogue to achieve a mutually agreeable solution.
Employers may wish to review the PII obligations of contractors and consultants on their projects and check that they are complying with the required obligations. Most PII clauses in building contracts and appointments allow employers to request such evidence, usually in the form of a current broker’s certificate.