Twin peaks: Will new safety laws spark insurer backlash?

Professional indemnity insurance premiums have only just started falling after their post-Grenfell peak. But some fear new building safety laws could spark another insurer backlash

In the years after June 2017’s Grenfell Tower fire, many contractors found professional indemnity (PI) insurance difficult to obtain, or watched their premiums soar in price. Having the cover, which pays out if a company is sued over work related to the design or technical specifications of a building project, is a standard requirement under design and build contracts. It can be the difference between being able to work or not.

“Some companies have been in the position that they cannot continue to trade because of the lack of PI insurance,” says Carlton Jones, director of the Metal Cladding and Roofing Manufacturers Association (MCRMA). The cover is considered such an important operating requirement that businesses are not allowed to join the MCRMA without it.

“There’s no question insurers are being a lot more cautious as to what they’re prepared to cover – and more restrictive”

Colin Jones, HCR Law

In a 2021 survey by the Construction Leadership Council (CLC), 31 per cent of contractors, consultants and specialists said they had lost out on jobs because they were unable to obtain adequate PI insurance. Almost a quarter changed the nature of the work they did because they were unable to get cover for fire-safety related jobs, which were seen as riskier in the post-Grenfell environment. The situation has improved in recent years, but after changes introduced under the Building Safety Act 2022 (BSA), some experts fear the situation could repeat itself on an even larger scale.

Softening market

From 2018, some firms saw their premiums rise by 60 or 70 per cent annually for the next two years. But the picture varied widely between different companies depending on their size and other factors. A CLC PI insurance working group survey in 2022 found 5 per cent of companies were paying premiums equivalent to more than 10 per cent of their turnover. “I’m firmly of the view that the premiums would have gone up if Grenfell hadn’t happened, because for years PI insurance in the construction industry had been underwritten at unsustainably low levels,” says Samantha Peat, insurance industry veteran and chair of the CLC PI insurance working group. The group was formed in 2020 to tackle industry-wide issues in the space.

Experts say the market has eased in recent years, but prices are not coming down as fast as they previously went up. The CLC’s 2022 survey found the number of those saying they couldn’t take on jobs due to a lack of cover reduced to 24 per cent, from 31 per cent the year before. “Premiums have now either plateaued or softened a little bit,” Peat says. “But it depends who you are. If you’re a tier one contractor or a signature architect paying £1m in premiums and you’ve got a good broker who’s going to argue the case for your ability to go elsewhere, it has softened. “That’s less the case with SMEs, particularly those who are fire engineers or want to work with high-rise buildings, because underwriters still don’t have an appetite to cover those sorts of risks.”

“All this new regulation makes sure that people follow good practice”

Tracy Keep, Gallagher

In October 2023, parts of the BSA came into force that increased the duties of a principal contractor on a higher-risk building project (see box, below). In June 2022, it had extended the liability period under the Defective Premises Act 1972 from six to 30 years. Under building regulations, clients are required to designate a principal contractor on a higher-risk job and that company must plan, monitor and manage all work on the project to ensure it complies with the regulations.

Some in the sector believe these changes could cause a repeat of the post-2017 coverage problems. “There’s no question insurers are being a lot more cautious as to what they’re prepared to cover – and more restrictive,” says Colin Jones, head of construction and engineering at HCR Law.

He says his firm is warning companies to be wary about terms included in building contracts, as PI insurance only covers liabilities that are not explicitly outlined in those contracts. “[Insurer uncertainty] is adding to the general difficulties of getting these contract documents in place,” he says. “But ultimately they are [still] being put in place.”

While cover remains available and contracts are being signed at the moment, insurers could rapidly change their approach. Paddy Synnott, account executive at brokerage Miller Insurance, believes that if a flurry of claims are made relating to the period of extended liabilities under the Defective Premises Act, the market could grind to a halt again. “This is the biggest change in regulation the construction industry has seen in a long time, and with any big change in regulation, insurers are going to be keeping a watching brief,” he says.

“For years professional indemnity insurance in the construction industry had been underwritten at unsustainably low levels”

Samantha Peat, CLC

Peat believes the roles of principal contractor and principal designer under the BSA also risk an insurance industry retraction. “If there are a flurry of claims and it’s, ‘look, you were the principal contractor, you were responsible for compliance with the building regs and so this is all going to fall to you’, that’s when I think you’re going to get the attention of the professional indemnity insurers of these dutyholders and they’re going to say, ‘no we don’t like this’,” she says.

Offering PI cover is often risky, she explains. The cover is provided under what is known as joint and several liability, a legally stipulated process meaning that a claim can be made against any party on a project, even if the issues they relate to were due to the work of others. If one company is insolvent or not adequately insured themselves, the liability passes to others. “Each one of them only has to be 1 per cent liable for the client’s claim, and they could pick up 100 per cent of the cost if everybody else can’t pay their way,” Peat says. “Insurance companies are not charities – they are companies seeking to make a profit for their shareholders. They have to do what they can to protect the profitability of their underwriting, and if that means excluding claims for principal designer and principal contractor duties and responsibilities, then why would they not?”

Other potential options in this scenario, she says, would be for insurers to introduce limits to the amount that they would pay out in the event of a claim. “I’m not saying it’s going to happen, I’m saying it’s possible that it could happen,” Peat adds.

As the principal contractor role is a requirement on every single higher-risk building, the impact of such a retraction could be as big or bigger than the previous hardening of the PI market. Synnott says if this does happen it would again hit smaller contractors harder than larger ones, as the bigger players are more readily set up to demonstrate their competence, with resources like large compliance teams at their disposal. “Insurers have been a bit cautious when it’s come to smaller companies that are doing that principal contractor role,” he says.

But some are not concerned by this potential issue. “I can understand why people were nervous, but so far that’s not transferred over into the market,” says Tracy Keep, development director and client service manager at broker Gallagher. “Generally speaking, insurers seem to be taking the approach – and quite rightly so, in my opinion – that all this new regulation enhances the risk management; it makes sure that people follow good practice,” she says. The BSA’s requirements for contractors to document the work on a project, share information with principal designers and hand over information to clients has increased insurers’ confidence in the industry,
she adds.

Synnott agrees that, so far, the requirements have been helpful for insurance companies, though he believes this is not a fixed situation. “The regulations have been somewhat helpful for professional indemnity insurance because insurers are more comfortable with the landscape that developers and others in the construction industry are operating in. There are more controls, more checks and balances,” he says.

Not unprecedented

If the issue does repeat itself, could it be over again relatively quickly? And in any case, might the latest changes be overtaken by other measures? “I’m old enough to remember what happened when CDM came in,” says Colin Jones, referring to the Construction (Design and Management) Regulations 1994, which introduced the principal contractor role, giving responsibility for health and safety to one designated company. “Initially there was shock and horror, then it gradually resolved itself and people got a grip around it,” he says.

Jones also notes that the industry has not seen the last of the regulatory changes that are likely to be introduced, with the recommendations of last September’s Grenfell Tower Inquiry phase two report not yet implemented (see box, below). “A lot of it will inevitably be trickled down to the sector to take responsibility for,” he says. “I think we’ll see a lot of other reforms on top of what we’re now getting used to.”

Under one such reform, being a principal contractor is set to require a licence. Peat says this could be helpful “if administered well”, because insurers like objective certification. But she says it could also make it more likely the company holding that role is viewed as taking on a disproportionate share of responsibility and risk – which insurers may not like.

In the meantime, what can contractors and others in the sector do to increase their chances of getting cover? While PI forms are often long and detailed, getting them filled in early can help brokers get you a good deal, says Keep. “If you can provide that information six or seven weeks before renewal date, it gives the broker time to go back to the underwriters and get the quotations on your behalf,” she says.

Synnott says: “Speak to your insurer as much as possible about the journey you are going on with the BSA. Showing your engagement with the regulations and the onus you’re putting on them makes you a more attractive risk.”