Professional indemnity insurance in construction – the position now
30 June 2022
“The market is hardening” seems to be the inescapable mantra in 2022. In some cases it seems to be not so much hardening as resembling granite. But why?
First, because insurance is a business. Underwriters are there to make money, and handing it back in the form of claims is not the plan. So if circumstances arise across an industry that indicate a higher than normal number of claims may be coming, the response of insurers is to limit cover, increase premiums, and withdraw from sectors or types of cover if it’s not looking sufficiently profitable.
Secondly, the world is ever more litigious. Whatever the reason – and there are many theories, from sweeping Americanisation to ambulance-chasing lawyers – there is an inexorable move towards claiming, rather than accepting that stuff happens.
Finally, there is Grenfell, and now the Building Safety Act. Professional indemnity insurance works on a “year of claim” basis, rather than year of event, so the 30-year liability for cladding claims brought in by the new Act will be paid for by current insurers, not the ones who provided the cover at the time of the negligence or breach of contract. That means that insurers are looking to protect themselves from calls upon the current purse by refusing to insure or limiting insurance to aggregate cover.
The difficulty, of course, is that those with new development projects need their contractors and professionals to be insured. Even if the developers might be prepared to use consultants without insurance, and simply engage those with large corporate assets, the funders won’t. Funders don’t accept that stuff happens. Funders need to protect their assets. Insurance is non-negotiable, and in an era of potentially high claims they insist that insurance is on the basis of any one claim. No point relying on designers having insurance only to find when you make a claim that someone else has already emptied the pot for the year. So if only indemnity in the aggregate is on offer then the limit of indemnity has to increase in the hope that the pot will be big enough…which means that premiums increase, so the cost of development increases, so the cost of rectification increases, so the necessary limits of indemnity go up too. And the rising costs force smaller consultancies to close, or be bought out by the bigger firms, leading to higher fees.
Whilst there’s no obvious answer it’s worth remembering that these things tend to be cyclical. The current position in unlikely to last. First, because once all the claims under the new Act are known and/or settled then the profitability of being an insurer will rise again. Secondly, because the shockwaves that this situation has sent through the industry is unquestionably causing construction to clean its act up. Closer scrutiny, more robust procedures, improved corporate governance and – above all – the realisation of the impact of past behaviours on both the industry and individuals will prevent similar situations arising in the future.
So, in the meantime, the hardening market position means that designers and contractors are having a hard time getting insurance. It may be easier to get cover if you always limit your liability under the contract, either by an overall limitation sum, or by reducing the limitation period to 6 years rather than 12. You could try improving your attractiveness to underwriters by using net contribution clauses in agreements as well. Whether or not clients and their funders will accept that is a different matter, but there are always some that will, and even a little better is still better. If you’re the client or the funder, of course, you could either insist on each and every policies and thereby reduce the choice of companies you can engage on your projects, or accept aggregate policies with reinstatement provisions and higher limits of indemnity and hope you don’t come unstuck.
There is, then, no magic bullet, but it is unquestionably the case both that appointments and contract are going to be subject to ever closer scrutiny before they are entered into, and that there will be ever more litigation. Conveniently, the Birketts’ construction team can help with both.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at June 2022.