Premium rates in the Construction Professional Indemnity Insurance (PII) market have returned once again to profitable levels, creating a more attractive proposition for insurers, who in turn have greater capacity and appetite to underwrite new business. Such healthy competition is improving conditions for buyers, with insurers looking to increase lines on held risks or offering rating decreases to firms with strong claims records and sustainable growth.
Small and medium-sized enterprise (SME) buyers stand to benefit the most from this trend, thanks in part to their lower relative risk exposure. Insurers continue to show some hesitance towards multinational exposures, although premium rates are decreasing in the right circumstances.
Cladding and fire safety exclusions ease
One notable change is the availability of cladding and fire safety cover for the majority of firms. While the standard International Underwriting Association (IUA) cladding and fire safety clauses remain, complete exclusions for these risks are becoming rare. Once again, this reflects a growing appetite within the market. As insurers increasingly seek out new business, they must keep themselves competitive. Added to this, previous projects involving cladding and/or potential fire safety issues will, in most cases, have already been notified to prior insurers. Therefore, any cover given going forward may not yet apply to the entirety of firms’ work profiles.
As ever, insurers continue to consider cladding and fire safety issues on a case-by-case basis. Where firms can provide evidence of effective risk management and clear information, insurers are demonstrating a willingness to write limited cover back into the policy as required. However, this is likely to have a retroactive inception date, whereas it was previously excluded entirely. Where cover is available, it is still largely on a restricted basis, with aggregate limits, increased excesses and consequential loss exclusions applied.
Insurers are no longer insisting on specific cladding and fire safety questionnaires looking at a 12-year portfolio, easing the administrative burden on insureds.
The Building Safety Act is one of many lingering uncertainties
Despite these improvements, uncertainty remains around the lasting impact on the insurance industry in the wake of the Grenfell Tower disaster. The Building Safety Act 2022 (BSA) came into force on 28 April 2022 and implemented several of Dame Judith Hackitt’s recommendations in her 2018 report ‘Building a Safer Future’. Although the full ramifications of the BSA are not yet apparent, it has undoubtedly increased the potential for civil claims. This is not least because of the extension of the limitation period under section 1 of the Defective Premises Act, which has given rise to issues on historical projects that would previously have been statute-barred. It will be some time before the impacts of the limitation extension are fully understood, but the extension does present a challenge to an otherwise improving market.
In addition, the principal designer role was also expanded within the BSA, creating increased obligations related to building regulations. This, too, has the potential to create a more vibrant claims environment in the construction PII sector.
The claims perspective
The PII claims story remains that in the UK, we continue to deal with the aftermath of the Grenfell fire. We are likely to do so until at least 2032, according to government estimates.
We are also still seeing significant issues with flat-roofed timber construction. Overseas, the picture is dominated by substantial contractor cost overrun claims on big infrastructure projects (especially in North America and Australia).
There has been a rise in high-value, complex professional negligence claims and the cost of defending these claims has also increased significantly. These claims typically involve numerous parties, further increasing the cost of defending them. We have seen a minor increase in adjudications, but this route is no longer significantly more cost-effective, especially where there are intricate design issues.
Large, complex claims often result in numerous notifications across multiple years. Insurers are progressively relying on coverage counsel to assist with managing these multi-year claims.
Therefore, the cost of claims to insurers is increasing in terms of both defence and coverage costs. Anecdotally, we understand there is a shortage of available construction mediators, which is having repercussions for dispute resolution. This could be related to the increase in large and complex disputes.
Insolvencies within the construction sector
Several insolvencies within the sector have been reported. These appear to result from the continually increasing cost of materials and general energy expenses in an industry that has not yet recovered to pre-pandemic stability. We are now seeing the further impact of global conflict upon the sector, with cost inflation and supply chain disruptions.
There have been some large contractor insolvencies. These repeatedly result in disrupting projects, be they new or remedial schemes. They also cause uncertainty within the supply chain, often resulting in other leading entities reviewing their contractual matrices and payment terms. It is not unusual to note an increase in project notifications following a key contractor insolvency and concern around business continuity.
Environmental, social, and governance (ESG)
Alongside many other sectors, the construction industry is progressively focused on environmental, social and governance issues, which has been compounded by the voluntary ‘Net Zero Carbon Building Standard’ released in September (aiming to structure the reduction of the construction sector’s environmental impact). While we have seen some claims arising from ESG against directors’ and officers’ insurance policies, we expect the frequency of such claims to increase.
If you would like to discuss any of the above, reach out to a member of our team.
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