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Sat June 25 2022

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Professional indemnity insurance and the Grenfell effect

19 Mar 20 Professional indemnity premiums have soared. Alison Lockwood, from the construction, engineering and infrastructure projects team at law firm Irwin Mitchell, explains why.

In the wake of the Grenfell Tower fire, an ongoing issue has arisen concerning the increase of professional indemnity (PI) premiums.  Quite understandably from the perspective of the insurer they are requiring significantly more information from architects about the projects they have worked on and the number of insurance firms willing to offer insurance has plummeted, with some providers even dropping out of the market altogether.

On 29th November 2018, the UK government announced details of its ban on the use of combustible materials on high rise buildings.  The new legislation came into effect on 21st December 2018 and is being implemented through changes to building regulations.  A review of building regulations and fire safety in England in 2018 said the regulations were ‘not fit for purpose’ and called for a ‘radical rethink’ of the system. 

Current situation for insurers

Inevitably, this has meant an increase in premiums being charged by those insurers still willing to provide the necessary cover in view of the uncertainty surrounding cladding products.  Insurers are showing caution, looking beyond high-rise buildings and have brought in broad exclusions for the type of cladding used at Grenfell which was combustible and have now extended exclusions to not only non-combustible cladding but other aspects of fire safety.

This has been the first big shift in insurance premiums in over a decade and many insurers are demanding the completion of extensive questionnaires at renewal for those working on tall buildings with any kind of rain screen cladding system. This imposes quite an obligation on many construction professionals who are likely to have an involvement in any shape or form with the cladding on buildings.

The availability of ‘any one claim’ cover is being replaced with ‘aggregated’ cover limits for many contracting risks with a cladding involvement and many insurers have a blanket cladding exclusion.

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Current situation for consultants

When negotiating professional appointments, consultants are facing increasingly tough contractual terms. A major concern is that at times some of the terms being negotiated fall outside of the consultant’s PI insurance.  This situation is going to cause a shift in the terms that lawyers acting for an employer will have to consider, as in the event of a significant claim not covered by a consultant’s insurance, it is quite possible that this could lead to the consultant being in financial difficulty as a result of the uninsured loss.

The question will also be raised as to where this will leave consultants, with the plethora of warranties signed in the past and agreeing to maintain PI insurance for 12 years on specific terms at the time they entered in to the warranty, in an ever changing insurance market. 

Moving forward

The United Kingdom’s International Underwriting Association has set up a construction committee to work with the industry, government and regulators to address the lack of PI cover.

The position in respect of cladding in particular is not something that is likely to improve in the short term. Insurance companies are going to remain concerned with their potential exposure and the balance of power, which has shifted to insurers, will remain with them for the foreseeable future.

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