The tragedy at Grenfell Tower has had a dramatic effect on the insurance cover available to building owners, leaseholders and anyone in construction responsible for design who relies on Professional Indemnity (PI) cover. Premium costs have jumped, and insurers are moving to exclude or limit cover for cladding risk in PI policy renewals. It means increased risk for anyone involved in owning or developing buildings. On top of that, the Government’s Draft Building Safety Bill
, published following the Hackitt Review of what happened at Grenfell is signalling that the proposed new regulatory regime will stop the game of liability pass the parcel typically played with design and build projects. Without further sophistication this approach could create a situation where designers must accept responsibility for work over which they have no control. It’s not hard to imagine how insurers would react to being asked to cover that. Some are already withdrawing from the PI market as it is.
Arguably, tighter building regulations, better controls over the selection of building components and more transparency about who owns liability ought to make insurers less anxious about risk. Right now, however, their immediate focus is on the possibility of multiple claims for tall buildings clad in unsuitable, if not dangerous materials. Until the new direction on regulation coalesces into a set of clear legal principles and becomes law, insurers will struggle to understand what actual risks they are being asked to underwrite. In the meantime, the RIBA reports that PI premium costs are doubling or in some cases tripling for some of its members.
It’s a potentially fragile situation where insurance cover might be unavailable or unaffordable until the uncertainty around combustible cladding risk is brought into focus and the new regulatory regime is in place. That isn’t going to happen quickly. Even when it does that won’t necessarily close off the risk of historic claims against designers and builders.
But why does PI insurance matter so much? For investors it goes to the heart of value because it’s the safeguard that underpins the worth of every professional appointment and duty of care warranty. Warranties and third-party rights protect purchasers and provide a level of comfort that reduces the friction around building risk that can sometimes slow or even derail investment transactions. Just like fire extinguishers, we hope we never need to use warranties, but we need to be confident they’ll work if we do. Without the continuous backing of PI insurance, their protection all but falls away.
Insurers themselves have always sought to limit their client’s exposure to claims. Over the years this has opened up an increasingly fractious tussle between the client and the consultant about having a defined contractual limit set for the designer’s responsibility for fault. It’s common now to see caps on liability in most professional team appointments or design and build contracts but the negotiation about the level at which these caps are set will continue. There is an obvious logic to setting caps at the level of the consultant’s PI cover – at least in the consultant’s mind - but on larger projects this often leaves the client feeling under protected, especially as a typical PI cover might be £10 million, albeit on an each and every claim basis. Now, the fight over liability and liability caps is set to intensify. We’ve been faced with the argument that liability should be limited to the amount the consultant was paid to do the job. It’s a piece of logic that unravels quickly when you think about how much the man who refuels your passenger plane gets paid and what the consequences are if he doesn’t do it properly.
Ultimately, it’s a fine balance, employers want as much liability cover as possible, but push too hard and the insurance market won’t be able to accept the risk and provide cover. At the same time, the insurers have to feel confident about the liability their clients are taking on. The combustible cladding issue has exposed systemic weaknesses in the network of regulation and responsibility for designing, specifying and constructing buildings in the UK and will lead to new law being enacted. Until that becomes clear they will continue to be cautious about cover, seek limits and attach qualifications, in the widest sense it’s always in their commercial interest to do so.
Our advice to investors is to exercise greater vigilance. It’s no longer possible to take it for granted that the PI insurance which backs duty of care warranties will be renewed or remain unaffected by modification or additional limits. Look at the track record of your contactors and the design team, find out about any high-risk projects on their CVs. It could mean they risk facing potential claims or struggle to renew their PI cover. And where you have warranties in place on newer developments check annual PI renewals to make sure they’ve been completed and that insurers haven’t used the opportunity to add additional qualifications to the cover.