Legal Q&A: Professional indemnity insurance
Martyn Stevenson, Associate, CMS Cameron McKenna Nabarro Olswang LLP
THE professional indemnity insurance (PII) market for the construction industry has been undergoing a significant hardening in recent years resulting in increased premiums, reduced cover, an expansion of exclusions and diminished availability. This has created various challenges and risks for consultants/contractors with design responsibilities who may struggle to obtain adequate and affordable PII, as well as clients who face a different challenge in ensuring the professionals they engage with are maintaining adequate cover for the projects they are instructing.
Market standard
It will come as no surprise that the key factors to this tightening of the market stem from the Grenfell Tower fire in 2017, the COVID-19 pandemic, and the economic downturn of recent years, as numerous industries have seen difficulties on the back of these events.
Looking specifically at the PII market in a post Grenfell world, what the disaster in 2017 exposed was a widespread use of combustible cladding materials which raised serious concerns about the fire safety and quality of building design, construction and regulation. This triggered a wave of claims, investigations, inquiries and litigation and formed the basis of the new legislation in the Building Safety Act and guidance on fire safety and building standards.
What this has meant for the insurance market is many insurers have imposed strict exclusions or limitations on PII for fire safety or cladding related risks or have withdrawn from the market altogether leaving many exposed or uninsured for potential liabilities arising from cladding issues. Tied in with the impact of these events is the changing nature and expectations of the construction industry, which have increased the scope and complexity of the services and risks involved in construction projects.
The professional indemnity insurance (PII) market for the construction industry has been undergoing a significant hardening in recent years resulting in increased premiums, reduced cover, an expansion of exclusions and diminished availability.
The industry has been undergoing rapid technological and environmental changes, such as the continued adoption of digital and innovative solutions, the integration of multidisciplinary and collaborative delivery models and the implementation of sustainability and energy efficiency standards.
These changes have created new opportunities and challenges for the profession, which has had to adapt to new skills, standards and regulations, as well as to new sources and types of claims and liabilities.
These changes have also posed new challenges for insurers, who have to assess and price the emerging and evolving risks and exposures of construction professionals, which has in turn led to a decrease in the coverage insurers can offer, or the coverage they had been offering now coming in at a much higher premium.
A tighter market
As discussed, these issues have caused a hardening of the PII market and has created some significant implications and consequences for both clients and consultants/contractors. This includes an increased difficulty and cost in obtaining and renewing PII cover, especially for those who are engaging in high-risk or complex projects, such as those involving cladding, fire safety, design and build, or modular construction.
Those seeking PII are facing limited options, higher premiums, lower limits, higher excesses, shorter or stricter terms and conditions for their PII cover, or may be unable to secure PII cover at all. This in line with rising costs across the board for materials and services. A distinct example of the changes in cover can been seen from the market moving away from offering insurance on an each and every basis with aggregate cover very much becoming the norm.
What this difficulty can create is coverage and liability gaps of PII cover, especially for consultants/contractors who may encounter claims or liabilities that are not covered or are only partially covered by their PII policies, due to the exclusions, limitations, conditions or endorsements that apply to their PII cover. Consultants/contractors face significant financial and legal risks, as well as reputational and operational risks, if they have to bear the costs and consequences of these claims or liabilities out of their own resources, or if they have to seek recourse or indemnity from other parties, such as subcontractors or suppliers.
Whilst the difficulties are clear for those trying to obtain and maintain the insurance, it has also caused issues from a client perspective; a key issue being an increase in financial caps in appointment agreements or building contracts. Consultants/ contractors are now either seeking to plug the gaps of liability caused by the increased difficulty of obtaining the same levels and coverage of PII they had previously, by negotiating overall financial caps into appointment agreements or contracts, or their insurers are insisting on such overall caps as a requirement in order to be able to offer the levels and coverage of PII. What this is pushing is for more creativity when insuring and a push towards different types of insurance such as project-specific insurances.
However, it still remains from a client perspective that a consultant/contractor with PI cover (regardless of level and basis) is preferable to one with no cover.
Looking forward
While it could be argued that market has slightly softened compared with the position in 2021 and 2022, there is still some cause for concern when looking to potential future issues. The effects of the Grenfell Tower disaster in 2017 are still being felt on the market and the ongoing uncertainty on fire safety and cladding remains the major issue in the sector. The Building Safety Act, which came into law in April 2022, has added a layer of uncertainty as there remain questions over claims relating to increased costs of remedial schemes to rectify cladding and fire safety defects, due to non-compliance with building regulations at the time of construction.
It’s unclear how the new legislation will affect the insurance market, but with increased liability periods and the possibility of retrospective application, it’s difficult to see how this could lead to any potential softening of the market in the near future.
Martyn Stevenson, Associate, CMS Cameron McKenna Nabarro Olswang LLP