Over the past few years, there has been a noticeable hardening of the professional indemnity insurance market across the construction industry. Recent events – including the Grenfell Tower tragedy, high-profile insolvencies such as the collapse of Carillion, Brexit, and now the pandemic – have all impacted on the availability of insurance.
We are now seeing a dramatic increase in insurance claims and a subsequent withdrawal of many insurance providers from the market. A recent Lloyds Review found the PI sector to be the second-worst performing across all lines and expensive claims have meant that the PI market has lost money every year for the past five years.
As a result, contractors and consultants now face higher premiums, new policy exclusions and more restrictive policy terms and conditions. Many businesses are struggling to obtain comprehensive PI cover. The Construction Leadership Council has termed this a “growing PI insurance crisis” and, in March, completed an industry-wide survey to inform its next steps in trying to tackle the problems the industry is now facing and establish cross-industry solutions.
Restrictions of coverage
The challenging market makes it very difficult for developers to resist limitations and exclusions within policies imposed by insurers. Without a change in market conditions or government intervention, the direction of travel may soon mean that developers are expected to underwrite any gaps in coverage.
The government has stated that it expects matters to improve when the new building safety framework becomes law. In the meantime, PI insurers remain very concerned about fire safety. Immediately following the Grenfell Tower tragedy it became commonplace for insurers to place coverage restrictions in relation to “combustible cladding systems”. In the years that have followed, insurers’ restrictions have developed to the extent that anything to do with an alleged breach of professional duty around the fire safety of a building is potentially now excluded.
While these coverage restrictions are common in the commercial office redevelopment sector, they are increasingly unavoidable in the residential, build-to-rent and student accommodation sectors. If PI coverage is restricted in this way, prudent contractors and consultants will seek to exclude their liability for fire safety issues on future projects. Again, in the absence of recourse against contractors and consultants, developers are left to bear this risk or attempt to insure against it.
Professional issues
Continuing industry efforts to remediate buildings with unsafe cladding have been hindered by the general unavailability of PI insurance for professionals surveying external wall systems and advising on remediation schemes. The problems experienced by leaseholders in the residential sector in relation to the EWS1 assessment process have been widely publicised. As a result, in February the government committed to work towards a “targeted, state-backed indemnity scheme” for qualified professionals unable to obtain PI insurance for the completion of EWS1 forms. The government has stated that it will work closely with the industry to design an appropriate scheme. It will be key for the industry to understand the eligibility requirements and the claims process, but it is hoped that this will help improve the market.
Cyber threats
The introduction of the General Data Protection Regulation in 2018 has seen cyber insurance stepping to the forefront of coverage restrictions, with insurers reviewing, restricting or excluding losses in respect of data protection breaches. While it has become commonplace to mitigate against the data protection implications of a cyberattack on data storage systems, many developers, owners and occupiers have still not properly considered how a cyber event could result in damage to their property, despite the fact that many insurance policies now contain such restrictions.
With the ever-increasing connectivity of appliances, devices and mechanical and electrical systems that play a key role in our buildings and professional lives, there is greater potential for dangerous cyberattacks on property. A good example of the interface is an M&E system which is used to control the heating and cooling of a building. These systems often have external connectivity for monitoring devices, which can be infiltrated by hackers.
Cyber restrictions and exclusions on PI insurance policies are becoming more prevalent and our vulnerability has been underlined by the increase in remote working during the pandemic, which has demonstrated how reliant organisations are on their systems and databases for the operation of their businesses.
Safety first
The consequences of this continued hardening are yet to be fully realised but collaboration at an industry level is needed to ensure projects can go ahead as planned. Of course, the insurance market also has to be profitable for insurers, and its current travails are outside the control of those seeking cover. However, there are aspects that the industry can address going forward, such as building safety, and the sooner a clear new framework emerges the better for the sector.
Lauren Morrison is a senior associate and Sadia McEvoy is an expertise counsel at Ashurst
