As the growing PII crisis shows no signs of abating what can we learn from the problems and potential solutions to the impractical, ever-widening range of exclusions
Professional Indemnity Insurance exclusions have mushroomed. What can be done? An investigation paper by the RIBA Council looked at how insurers and architects could work around the risks to enable PII to cover architects’ work.
Common exclusions for policy renewals are contamination, asbestos, deleterious materials, swimming pools, basements, high rise, cladding and Fire Safety.
The current worry for the profession is that the professional indemnity insurance market for architects is not particularly large, and while insurers don’t want to exclude architects entirely, they are worried that some aspects of architectural practice are too risky to be profitable. The problem is that some of the areas that underwriters are trying to sidestep are fundamental to most architects’ practice. One architect was recently told that PI insurance for a basement swimming pool would have to be reissued with different underwriters at three times the annual premium. This borders on the unaffordable and could never be considered proportionate to the overall extra risk.
One architect was recently told that PI insurance for a basement swimming pool would have to be reissued with different underwriters at three times the annual premium
The first exclusions appeared decades ago and tended to be for contamination, especially from asbestos. This was understandable, as the disease and deaths caused by asbestos could result in huge disproportionate claims. Architects could get around this by simply not getting involved in looking for asbestos and telling their clients that they had to hire specialist surveyors when contamination might be present.
Next came a list of deleterious materials. Dealing with the barn door after the horse had bolted, client lawyers and insurers began to list deleterious materials that could not be specified because they had caused claims. Again this was fairly simple to accommodate as most of the materials, with a few silly exceptions, were generally banned from building projects. This included stuff like high alumina cement or straw board that was well known to deteriorate dangerously and which few consultants would continue to specify.
Widening the net
Around the turn of the current century, a bunch of public swimming pools had to be radically re-built because their designers were simply unaware of the problems caused by the interior humidity generated by the evaporation from a warm enclosed swimming pool. Pre-war indoor pools were usually masonry and concrete structures lined with tiles to withstand this. But after the war, steel tended to be used for structure with double glazing that was well sealed to stop all natural ventilation. Humidity would condense in out-of-the-way places where there might be cold bridges through the steel structures. The buildings deteriorated prematurely and often needed to be demolished. As their architects suffered claims, so insurers decided not to cover swimming pools at all. This is a serious problem as anyone who designs houses for the wealthy might be asked to include a pool. If designed with proper materials, insulation and ventilation there need be no problem, but most PI policies try to exclude all swimming pools. If you are a practice that does these routinely, you probably know how to design out the common risks but it can still greatly reduce your market for insurance. Otherwise, architects commonly recommend specialist design build subcontractors to build pools that would include installing the correct insulation and ventilation, and the specialist’s insurance would cover the pool design.
With the level of failures presumably too high, many insurers now propose a blanket ban on basements
Even more absurd is an exclusion that appeared in the last decade or so for basements. Especially in high value urban areas, the wealthy increase their home values by adding further levels underground. Extending below existing buildings is difficult. They are rarely accessible with mechanical diggers and the lower floors are often supported by the earth. Holding the building up when removing a further floor level’s worth of soil involves laborious underpinning and hand excavation. You sometimes see conveyor belts taking shovels full of soil up to dump into a street level skip, and the excavation for confined sites can take years. Then the basement must be made damp resistant. With the level of failures presumably too high, many insurers now propose a blanket ban on basements. Of course, only very small firms would regularly design buildings with no basement levels; most newbuilds of any scale have them. This exclusion affects a large number of firms, and if it is retrospective it is impossible to accept. Any basement previously designed and built would be excluded and a claim would have to be paid for out of the firm’s cash flow – negating the purpose of insurance. What insurers don’t understand is that the part of basements designed in detail by architects is not the bit that generates claims. Architects concentrate on space use, finishes and access, rather than structure and waterproofing, which are almost invariably specified by consultant structural engineers trained for such technicalities. Such participation could be required by policies to reduce architect risk accordingly.
Now for high-rise
Exclusions get still worse. At around the same time as basements, ‘high rise’ buildings appeared on the exclusion list. High rise is usually defined as over 18m and has its own extra building regulations, in particular for fire proofing, structure and means of escape. The problem is that an 18m high building is not really very high. It is six storeys, or the common maximum height for a traditional walk up building. Cities are full of these built over the centuries for which renovation is bread and butter to the profession. What the public thinks of as high rise is the next threshold which is 30m, or about 10 levels. These are usually post-war buildings with lifts. As these are all very common building types, excluding them cuts out a large proportion of the profession. This is unreasonable: there are firms that do this scale of buildings all the time with expert consultant teams and without incident. Mid and large size practices would end up unable to insure their most usual type of work. Again, what underwriters need to understand is that the larger firms that do high rise buildings – usually with basements – work with client-appointed consultants not only for structure and services but also for fire safety and building regulations. Consequently, the architect routinely avoids the kind of direct liability such work is concerned with. For this type of tall building risk, policies could be couched in words requiring practices to insist that clients hire suitable fire safety consultants with their own PII to advise (though this really only applies where the professional services contract includes a net contribution clause, and that this is something that clients often resist).
The distinction as to which types of cladding carry risk could be specified – which is how deleterious materials are dealt with – rather than a blanket ban on cladding cover
The most egregious new exclusion is for ‘cladding’ that has come following the Grenfell disaster. What insurers should be saying is they will not cover flammable ‘rain screen’ cladding, which is what burned at Grenfell. Wrapping the exterior of a building with insulation is the most effective way to conserve energy. Rainscreen cladding is a cosmetic layer used to hide the insulation that would otherwise be unacceptably ugly. There is often a gap between the uneven insulation and the covering that is supposed to look flat and sharp. If both insulation and rainscreen are flammable, the gap can act as a chimney. That is what happened with the Grenfell horror. Buildings all over the UK used the Grenfell system and they are now being replaced at great expense to insurers, landlords and unfortunately residents. Unfairly, however, the term cladding can also mean single layer brick with cavity that is a traditional and perfectly safe way of surfacing the elevation. Suffice to say that all buildings have exterior elevations with surfaces that could loosely be described as cladding, so to exclude all projects with cladding will again render PI insurance useless. The distinction as to which types of cladding carry risk could be specified – which is how deleterious materials are dealt with – rather than a blanket ban on cladding cover.
Most draconian of all exclusions, however, is fire safety. It is a fundamental job of an architect to identify where there might be danger from fire in a building. Most fire danger is minimised by following the many building regulations for flammability of the structure and contents as well as means of escape. If insurance was void when a building catches fire, then the architect could be held liable for all the material expenses and people’s lives damaged or destroyed by a building fire. Almost any building can catch fire, so to void insurance for building fires would disqualify almost every architectural practice. Although clients are supposed to insure their buildings for restoration in case of fire, that does not usually include contingent losses from injury and the like. Also, if they detect design negligence as a contributing factor to a fire, the insurer may proceed against the architect for fire damage. Another problem with fire is that it is impractical to expect all architects to consult a building inspector or fire engineer at the first stages of design. Until the client has received planning approval they are quite reasonably loath to take on the premature expense of building control. Architects are quite capable of assessing means of escape at the planning stage and indeed should be covered for giving fire advice on extensions and smaller projects, so to exclude fire completely is an unreasonable stance for insurers. The government should consider whether they should be allowed to, as long as the ARB says PII is compulsory.
A problem here concerns the legal profession. When there is a claim to be made, the client’s lawyers advise them to throw a big net over the entire building team, on the basis that anyone on it may be found to bear some aspect of liability, however small, and others may not have sufficient insurance. Thus some insured member of the team ends up carrying the burden of the damage. If an architect was to pass the waterproofing design of a basement, for example, onto the structural engineer in the normal fashion and that basement later shows damp, the client’s lawyer will advise him not to worry about whose responsibility it is but to simply sue the architect, structural engineer, services engineer and contractor all together. Eventually, as more evidence is obtained, it may become obvious whose fault it is and the claimant will drop the pursuit of some more distant members of the team. In the meantime, the team members who were not involved in the design will have nevertheless made a claim on their PI insurance and their insurers will have had to pay for lawyers to defend them as far as the claim against them ran. This will appear as a paid out claim even if they were found to have no fault. In some cases, a designer who had really nothing to do with the problem has had to defend themselves all the way through at trial and the judge may find they had some trivial participation in causing the problem like introducing the specialist who did cause the problem. Multiple defendant lawsuits are extremely inefficient in that every defendant team member has to get ‘lawyered up’ individually and a huge number of solicitors and barristers duplicate each other’s work defending all those caught in the net. The legal costs often grow larger than the eventual cost of rectifying the problem, and the losing claimants still only pay a portion of the costs of resisting the suit. One suspects that far and away the lion’s share of PI claims paid out each year are for legal defence fees rather than for actual damages. Lawyers should be required to ‘Triage’ their claims with respect to the building team, and there should be defined consequences for knee jerk inclusion of remote members of the team with little or no potential to have caused the problem.
One suspects that far and away the lion’s share of PI claims paid out each year are for legal defence fees rather than for actual damages
To some extent this can be alleviated through net contribution clauses in appointments, which say that the consultant will not have to pay out more than his portion of the liability for the damage within the team. These are strongly resisted by client lawyers who are understandably looking for a way to get their clients reimbursed by whoever is solvent and insured, regardless of who is to blame.
The way to alleviating insurers’ concerns in this burgeoning environment of exclusions would be to find a way to pass off the responsibility for these difficult categories of building onto specialists who have specific training and experience to handle them. Structural engineers must be instructed for basements, especially retrofit ones. Cladding designers must be engaged for rainscreen type elevations. Fire safety engineers should be commonly hired to work out compliance with means of escape regulations. If architects undertook always to advise their clients to hire such specialists whenever relevant, then the insurers should feel much more confident about covering the architect’s risk. Of course, however, these specialists are now finding it difficult to get insurance for themselves.
One way to avoid the draconian all-encompassing net is through individual project insurance which will pay out for a fault, regardless of who may have caused it, usually for a period of 10 years from completion. This protects the claimant and gets it paid quickly, although project insurers can still launch a claim the against team members that they deem liable.
Policy exclusions represent a clear danger to practice and of course to the public if practices cannot pay out when found to be negligent. This will continue to be a factor in some unavoidable categories. They can be modified through negotiation of policy wording or by government intervention – as is the case in vehicle insurance where policies have to cover certain aspects and categories for the protection of the public.
Alfred Munkenbeck is an architect and a member of the RIBA Council’s insurance group. This article is based on an investigation paper by that group