Construction companies face insurance cover drying up post-Grenfell

This article was first published in Business Matters Magazine on 17 June 2021.

The issue is creating a “two-tier system” where only those firms prepared to procure appropriate professional indemnity cover can undertake higher-risk projects.

The Construction Leadership Council survey results indicate that professional indemnity insurance premiums increased almost four-fold at the last renewal, having doubled the year before. Meanwhile, a quarter of respondents reported losing work due to inadequate professional indemnity cover. A similar proportion have changed the nature of their work due to strict conditions and limitations placed on them by insurance firms.

Even though high rise residential work makes up less than 5% of the work of two-thirds of firms surveyed, almost one in three could not buy the cover they needed in the wake of the Grenfell Tower fire. In addition, over 60% of survey respondents have some form of restriction on cover relating to cladding or fire safety, while one in three have a total exclusion in place for cladding claims and one in five for fire claims.

The survey results back up issues we are now seeing in practice due to a hardening of the professional indemnity market. The impact of this shift is likely to be disproportionately felt by SMEs, which are less able to shoulder the burden of increased premiums and are often reliant on the ability to accept a variety of work. We are starting to see, in effect, a two-tier system, where only those able and prepared to procure appropriate professional indemnity cover can take on work on higher risk projects. The forces of supply and demand then give those contractors and consultants a stronger bargaining position in commercial negotiations.

A majority of respondents to the CLC survey said they buy cover for £10M or less, with very few buying over £30M. Almost half said they had been declined insurance by three insurers or more, while two-thirds carry a claim excess imposed upon them by their insurers.

Difficulties in obtaining professional indemnity cover have implications for projects completed during previous insurance periods as well as current schemes because professional indemnity insurance operates on a “claims made” basis.

Contractors and consultants are typically obliged to maintain insurance cover at the same level in place when they delivered the work. This must be the case for the duration of the limitation period in which claims can be brought. Any failure to do that could be a breach of contract and could mean that a future claim is not backed by adequate insurance. The excess liability required in these instances might well push smaller contractors or consultants to the wall.

There are no obvious solutions, but – given that the dynamics of the professional indemnity market are driven by insurers’ appetites for risk – there might be value in encouraging a more nuanced assessment of the business models of insured consultants and contractors, particularly the two thirds for whom less than five per cent of work is high risk. If the current constraints persist, that might lead to more fundamental changes in the way work is allocated, including, for instance, by renewed emphasis on alternative models, such as the integrated project insurance route.

If you need legal advice, please do contact our construction team.

Read the article in full here.