Professional indemnity insurance (PI) protects construction firms against allegations made by clients relating to errors in the design or the construction of a project – covering their legal defence costs and any damages awarded. But premiums and excesses for construction PI have rocketed in the past couple years.
How has this happened? And what can you do about it?
For more than a decade, there had been an ample supply of insurers keen to provide PI cover to construction companies, leading to plentiful, affordable insurance cover being available. However, the tide turned in 2018, and a significant increase in PI claims has ensued, following various large-scale catastrophes in the construction industry, including the Grenfell Tower fire and Carillion’s financial collapse, as well as construction projects becoming more large-scale and complex, due to the implementation of evolving technologies. Such a rise in claims has generated a high demand for insurance cover and a lower supply, resulting in higher premiums, more stringent criteria for securing cover and more restrictive policy terms and conditions.
Compounded by the Covid-19 crisis, price increases and lower availability of cover are expected to continue for the foreseeable future – with many construction companies struggling to obtain comprehensive cover.
One of the key factors leading to the industry’s challenging PI market is the cover restrictions being imposed by insurers around fire risks, following the Grenfell fire in 2017. Insurers have become concerned over their exposure to high value cladding related claims, especially in light of the government’s updated cladding regulations earlier this year. As a result, insurers have become more cautious about the risks they are prepared to take on, whilst also introducing new policy exclusions – from those involving combustible aluminium cladding materials, through to claims arising from a failure to meet the applicable fire regulations.
As construction PI cover is offered on a claims-made basis, means is that it is the policy in force at the time the claim is made that deals with it, rather than the policy in force at the time the work was done, liabilities arising out of past projects are as much of a concern for insurers as current and future projects.
Another key driver has been the increase in PI claims within the UK construction industry, both in terms of number and size, due to more large-scale and complex projects which inevitably carry higher risk, and the increased use of new technology - especially waste-to-energy technologies, which convert non-recyclable waste into usable forms of energy. Consequently, increasing claims settlements for insurers has been of particular concern, and as a result, insurers are offering lower value cover against claims and are less likely to have the ability to negotiate terms.
Insolvencies in the construction industry have also exacerbated the issue. This follows the financial collapse of Carillion in January 2018, which had debts of up to £1.5bn, partly due to taking on too many risky contracts. Supply chains were subsequently impacted, creating disruption across the UK construction industry and making insurers nervous about construction firms’ financial resilience.
Uncertainty in the current economic climate is not helping the situation, with the delays and cancellations of projects caused by Covid-19 further impacting availability of insurance cover - although it is too early to say what the full implications will be.
These factors have culminated in a volatile marketplace, and in a 2018 insurance market review, PI insurance was identified as one of the worst performing business classes for insurers, with claims pay-outs substantially exceeding premium income. The response of many insurers was to pull out of the market completely and those that remain have implemented strict measures, including introducing higher premiums and applying restrictive language to policy terms and conditions.
However, while UK construction PI market conditions are extremely challenging, it is possible for construction firms to take steps to help manage insurance costs and cover.
Starting the renewal process early is key. Insurers are adopting a robust approach to assessing risks, which means that the renewal process is taking more time, and so firms should leave plenty of time to put together the extra information that insurers may require, and answer any additional questions that insurers may pose. Providing insurers with as much information as possible, as early as possible, gives brokers the time and opportunity to negotiate.
Construction companies should also carefully consider the status of any on-going claims, ensuring that all outstanding matters are dealt with or are otherwise closed off. It is also critical to demonstrate that lessons have been learned as a consequence of any losses that have led to claims.
More focus is being placed on firm’s internal procedures and risk management controls when considering taking on a risk, and so it is vital that organisations provide documentation of risk management policies and procedures; robust cashflow management measures; client and supplier contracts and efficient supply chain management methods, and that they can demonstrate to an insurer that the business is well managed.