PI Insurance in the wake of the Building Safety Bill

• United Kingdom

• Construction and engineering

25-04-2022

Simon Chamberlain and Chris Ives (Eversheds) and Michael Crouch (Gallagher).

As the Building Safety Bill progresses through parliament and is likely to become law within the next few months, much attention has been focused on how housebuilders, contractors, and their supply chains will be able to respond to new claims arising from ongoing issues relating to the use of combustible materials in residential premises.  In this article, Eversheds have teamed up with professional indemnity insurance broker Gallagher to consider the issues.

The first port of call in the event of any claim, or claims, is insurance.  Professional indemnity insurance (“PI insurance”) responds to civil liability claims for professional negligence, and although this does not provide cover for workmanship issues, it potentially has wide scope by including negligence in the design and in the use, specification and authorisation of materials. 

The insurance market is still processing the high volume of claims and notifications made in the wake of the Grenfell Tower tragedy in 2017.  In June 2020 the government reported that there were still over 2000 high rise buildings that have unsafe cladding¹.  In May 2019 the government initially allocated £200m of funds² to remove and replace unsafe cladding from high-rise residential buildings but subsequent government funding announced to date is circa £5bn³ (although the cost of remediation on all affected blocks is estimated to be £15bn).  A significant proportion of these costs are being sustained by insurers and have caused PI insurance premiums to skyrocket.  Since then, proposals under the Bill are likely to further increase the number of claims.  Such changes are likely to cause further challenges in the PI insurance market as it struggles to balance risk. 

Change in the level of PI insurance cover in the wake of Grenfell

One of the most prominent changes in coverage following the Grenfell Tower tragedy is the restrictions in cover for cladding and/or fire safety issues. Cladding is usually defined widely to cover a range of combustible materials and includes external wall systems and fixing systems.  Fire safety is a catch all term in relation to all fire safety matters and the fire performance of a structure.  This can include insulation, cavity barriers and any other fire stopping material or system.

In the present circumstances, insurance cover for these types of claims is predominantly only available to larger main contractors.  Many other parties in the supply chain are now no longer able to procure cover for cladding and/or fire safety, with these being explicitly excluded from their policy.  This is highlighted by the massive differences in cover between architects at the moment.

Where such cover is afforded it is on a highly restrictive basis and subject to large self-insured excesses, which are applied on a per building basis rather than per claim basis.  Cover is limited solely to rectification costs, meaning that there is no cover afforded for consequential loss elements of the claim, such as loss of use, loss of profit, LADs, rehousing costs etc, which are frequently the highest value elements of a claim. Furthermore the cover is on an aggregate basis, and with no reinstatements.  This means that there is only a finite pot of money available to the insured to meet these types of claim across all their projects in a policy year.  Once this pot is exhausted there is no further cover available for any other fire safety/cladding claims in that year. 

Changes to policies will have been introduced at each renewal of the annual PI insurance policy.  It is likely that broader cover was available at the time the parties first entered into their contract, but this cover became increasingly restricted over time by the insurance market due to the volume of claims.  For PI insurance however, the relevant level of cover that responds to the claim is the amount of cover that the insured holds at the time the claim or circumstance is notified (as PI insurance responds on a “claims made” basis). This means that there could be a disparity between the level of insurance which a building owner/housebuilder believes their project team has in place (based on information that was provided at tender stage) compared with what their project team actually has at the time of a claim.  This could mean that a large proportion of claims are likely to be uninsured by one or more parties.

A key question for building owners/developers is to determine the scope of their contractor’s and consultants' PI insurance cover.  Very often there is a contractual obligation upon the contractor and consultant to procure PI insurance for a certain limit and to maintain it for a number of years (usually 12 years to match the length of their contractual liability under a deed).  There is usually a contractual obligation to evidence such insurance by sending to the developer/housebuilder a broker’s certificate each year confirming the amount of cover held.  However, such broker’s certificates do not normally provide any detail on the coverage afforded and rarely specify the nature and extent of any exclusions under the policy. 

Sometimes contracts have an additional requirement for the contractor/consultant to maintain PI insurance where it is available at commercially reasonable rates, permitting the contractor/consultant to reduce the level of cover maintained.  This is accompanied by an obligation to provide the building owner/developer with an update if the scope of their PI insurance has changed, so that alternative arrangements can be put into place, but this is rarely exercised in practice.

What alternatives are there in cover?

Another problem in attempting to monitor insurance cover is that even if the contractor and/or consultant notified the developer/housebuilder about a change in their cover, there are unlikely to be any alternatives to provide equivalent protection for fire safety and cladding claims. 

Latent defects insurance does not offer an alternative means of recovery as claims under that type of insurance are triggered by physical damage to the completed works.  Claims for fire safety and cladding are in relation to breach of duty and non-compliance with Building Regulations, usually in the absence of physical damage, and so this will not amount to an appropriate right to make a claim under this type of policy.   

In the past, the insurance industry has been able to respond to some insurable risks by supporting reinsurance schemes, such as Pool Re (for terrorism) and Flood Re (for flood risk).  In these types of schemes the risk is shared amongst the insurance industry as a whole up to a certain level, beyond which point the government steps in to provide cover.  However these types of schemes are not presently considered to be a suitable solution for the current cladding crisis and there is no appetite from government to facilitate support for the insurance market.

How insurers are likely to respond to the Building Safety Bill

The Bill proposes significant changes to the Defective Premises Act 1972 (DPA) such as:

• a 30 year retrospective limitation period and 15 year prospective limitation period for claims under s.1 of the DPA for new build dwellings which are unfit for human habitation; and
• the inclusion of a new statutory offence under s.2A for making existing dwellings unfit for human habitation, with a 15 year prospective limitation period.

These changes will mean that a greater number of buildings will now fall within the scope of the DPA.  Whilst there is some debate as to whether the duties under s.1 and s.2A give rise to strict liability, which would create difficulties for claims under a PI policy which only responds to negligence, the courts may decide that these offences are subject to a reasonable skill and care obligation akin to negligence which would be covered by PI insurance (except for workmanship). 

Consequently, a DPA claim arising from the retrospective 30 year limitation period would potentially be covered under the PI insurance policy of an insured party, where such cover is afforded, even if the contractual obligation to maintain PI insurance for 12 years from practical completion has expired. This is because any party still in business will be maintaining PI insurance cover, and therefore their policy would potentially respond to the DPA claim (regardless of the fact that the limitation period is 12 years for contracts executed as a deed).  However, a number of parties may have no cover in place because it is now excluded under their policy, or because they are no longer in business and consequently their PI insurance will have lapsed.

Most insurers have restricted the availability of cover for these types of claims, so if a new claim is notified (for example due the potential 30 year limitation period) that would be insured under the current PI insurance policy.  It is also possible that the scope of such insurance cover is likely to be restricted even further by insurers in the next policy year in response to the number of DPA claims.

The future

Some bespoke insurance products can be developed on an individual basis, but these are likely be expensive and would need to be carefully devised so that they respond to the types of claim that could be faced.  At the moment the situation is volatile, due to lack of information on the number of residential properties (and in turn possible claims) that could be impacted by the recent changes to the Bill being proposed by parliament. 

Until the situation settles it is unlikely that any new insurance products will be offered to the market.  Even then, such new products are likely to be in relation to prospective claims and not claims or circumstances that have already been notified.  It remains to be seen whether the Bill once enacted will provide increased confidence in matters of fire safety and cladding so that the current exclusions commonplace in PI insurance policies can be removed.  At present, and for the foreseeable future, the exclusions and restrictions in PI insurance cover are likely to remain, meaning that many defendants in cladding and fire safety matters will not have cover available to them to respond to such claims.  On that basis, it has become increasingly important for housebuilders, contractors and design professionals to review their past projects and identify any projects that may be subject to a DPA claim and to plan their own financial contingencies to respond to such claims.

1. Cladding: progress on remediation (parliament.uk)
2. Private sector ACM cladding remediation fund: prospectus - GOV.UK (www.gov.uk)
3. Government sets out new plan to protect leaseholders and make industry pay for the cladding crisis - GOV.UK (www.gov.uk)