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Insurance exclusions cast ominous shadow

Josephine Smit

The many grim legacies of the Grenfell fire include its effects on construction’s reputation, nowhere more so than PI cover which has all but vanished. Hope is scarce, but it does exist

Credit: Toby Morison

The insurance industry markets itself on the reassurance and protection it provides for, as the advertising slogans so often say, life’s rainy days. That is not quite the way it is working out for the construction industry. Rather than a rainy day, the industry has faced a storm following the Grenfell Tower tragedy, and the weaknesses it has exposed in construction’s fire safety standards, processes, practice and systems have had an impact on insurers’ policy approaches.

As a result, securing essential professional indemnity (PI) insurance has become a struggle for practices large and small, with once stable premiums soaring by 500% or more over recent years and policy exclusions relating to cladding and fire safety now commonplace. Small wonder then that PI insurance loomed large among the subjects discussed in a debate late last year about the industry’s future. Rebooting Construction in the UK, hosted by the RIBA and RIBA Journal in association with Hilti, brought together architects, insurers, fire professionals and other key figures to look at this and other ways in which the industry could move forward positively in the wake of Grenfell.

The insurance industry’s position was set out clearly by Matthew Greene, senior underwriter with Manchester Underwriting Management. ‘What PI insurance covers is single claims for a particular circumstance or maybe multiple circumstances, on a single company. What it does not cover is where there has been a market failure, or in this case almost a government failure, where it causes a systemic issue, which we’ve seen with fire safety.’ Problems in securing cover in relation to fire since Grenfell reflect the fact, that, he added bluntly, ‘The insurance industry has pretty much lost faith in the construction industry managing its ability to reduce fire claims.’ 

Rather than a rainy day, the industry has faced a storm following the Grenfell Tower tragedy

Jenny Carter-Vaughan, managing director of broker Affinity Select Insurance Services, said her own recent calls to sellers had failed to find anyone offering exclusion-free policies. ‘Our experience at the moment is essentially that all underwriters are applying very, very strong combustibility exclusions,’ she explained. ‘And essentially if you are wanting to get cover for design and fire escape and safety systems, doors, windows – anything which has a fire connotation to it – effectively that is now written out of all insurance policies.’ With insurers taking a more cautious stance and withdrawing from some markets in the UK, construction’s fire safety failings have left it with little purchasing power. To put that into context, Carter-Vaughan says that while 60-70 insurers are currently offering motor insurance, only five offer PI insurance to architects.

It is a gloomy picture and one that puts the onus on architects to provide as much information as possible to enable the insurer to fully understand its risk profile. Carter-Vaughan outlined what that means in practice: ‘If we send a form out and the architect looks at it and thinks, that’s not applicable to me and they write N/A on it, that really doesn’t help us. What helps us is when they fill it in and give us answers and details, so that’s things like their quality assurance policies and procedures. Knowing those bits and pieces of information makes a huge difference from our point of view in the conversations we can have with insurers.’

Her points were confirmed by Will Freeman, design director at Wates and a non-executive board member at the Architects Registration Board. ‘I’m hearing of more and more architects getting exclusions and the range of those exclusions is becoming more and more worrying,’ he said. But a forum facilitated by Arb to discuss the challenges found that a few architects had developed positive relationships with their insurer, he explained. ‘We started to see that those that were able to demonstrate proper quality assurance processes within their practices were able to mitigate the risks through a documented process and help reassure the insurer.’

While 60-70 insurers are currently offering motor insurance, only five offer PI insurance to architects

Formation Architects is among those to have full cover, albeit aggregated in respect of issues relating to fire. ‘That’s partly because of the long-standing relationship we have established with our brokers and insurers. There’s trust based on that long history,’ said partner Neil Farrance. But he voiced concern at the general lack of transparency around limitations on PI cover when tendering. ‘At the moment the industry is adopting an ostrich-like approach to PI and I fear that many clients are being lulled into a false sense of security by architects who, maybe, don’t declare limitations on their cover,’ he said. The RIBA’s updated Professional Services Contract (PSC) 2020 requires architects to state what cover is maintained for cladding and/or fire related issues. ‘But that requirement doesn’t exist widely in bespoke appointments,’ pointed out Farrance. ‘I believe there should be an obligation to declare cover and I believe that’s something that developers and contractor clients might beneficially take into account.’

The construction industry’s route to reform and winning back trust is the draft Building Safety Bill, currently making its way through parliament, which sets out a new safety regime that places key responsibilities with dutyholders, including the principal designer. That begs the question of how dutyholders will be regarded by insurers, something broker Carter-Vaughan saw as problematic. ‘I think that’s going to be an issue because I don’t really think the insurance market has thought about it at the moment,’ she said.

The Ministry of Housing, Communities and Local Government (MHCLG) select committee came to a similar view in its pre-legislative scrutiny of the bill, published last November. ‘The select committee noticed that there was a big problem,’ said Gillian Birkby, consultant in the real estate department of law firm Fladgate. ‘It recommended that we don’t have another version of the bill and put it before parliament until there has been an evaluation of the availability of adequate insurance for all dutyholders and a report to parliament on that.’

That evaluation may be essential but it is another slow step in what has become a long-running process. As the fourth anniversary of the Grenfell Tower fire approaches this summer, the bill and its much-needed safety reforms seem a distant prospect. ‘We are more than three years on now and the detail is still very much being worked out, argued about and then is going to be implemented,’ said insurance underwriter Greene. ‘It is going to take another two years to really start to show the benefits’. In the meantime, insurers look unlikely to change their assessment of construction. 

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