Are the problems of Carillion simply bad timing, or is it a potential bellwether of wider problems in the industry?
Not for the first time, critics have acknowledged an increasingly fragmented and highly competitive construction industry. The tragic events of Grenfell Tower last summer clearly demonstrated an all too common but poor set of practices that encourage a ‘short-term and siloed’ view across the industry. The established process requires bidding aggressively for contracts and accepting slender margins, leaving little room for maneuver.
Oxgangs Primary School in Edinburgh
Within days of the fire, The Prime Minister announced a Public Inquiry be set up to establish and learn from the facts. It is too soon to analyse the full extent of the impact on the insurance industry and it may take some time to implement the changes required to improve the safety of the buildings designed to accommodate people, However, Dame Judith Hackitt’s Interim Report on Building Regulations and Fire Safety in England and Wales has been praised by the Construction Industry Council, who said that the review had followed the industry’s recommendation.
Former chair of the UK Health and Safety Executive, Dame Judith called for an overhaul of the regulatory system so it would “hold to account those who try to cut corners.” The results of the Grenfell Tower Inquiry led by former Lord Justice of Appeal, Sir Martin Moore-Bick, and final report are expected to be released later this year.
The sudden and dangerous collapse of a wall at Oxgangs Primary School in January 2016 prompted similar high risk, low cost concerns; the Report of the Independent Inquiry into the Construction of Edinburgh Schools, found that “A number of witnesses to the Inquiry identified a desire to reduce the cost of fees as a major factor in deciding the level of provision in effective inspection of construction, rather than a serious assessment of the risks of not providing for adequate independent scrutiny”. Our underlying concerns were aired at the IStructE’s ‘Beyond Edinburgh Schools’ summit last year, when we called for a ‘more fundamental debate about how risk is managed and not merely focus on how to fund risk when it goes wrong’.
One thing that we can be sure of is the true implications of risk-dumping; consultants are doing more for less, under increasingly onerous contracts. Risks are being ‘transferred’ from one party to another without great consideration being given to the ability to manage the risks or financial capacity to absorb the loss should the worst happen. We are increasingly seeing contracts which include extended duties of care, strict liabilities, indemnities and absolute obligations relating to construction; aside from securing effective Professional Indemnity Insurance, our advice to consultants in this situation is to understand and balance the risks/ rewards whilst challenging conventional wisdom.
One of our primary 2018 risk awareness themes is to ‘mind the gap’ between the obligations being presented and the extent of insurance cover available for the risks those obligations create.
The PI Insurers initial response…
Following the Grenfell Tower tragedy, issues relating to cladding and fire safety in general have led to the established Professional Indemnity (PI) insurance market expressing concern about the potential extent of exposure sitting within their portfolios.
The interim report from Dame Judith makes for uncomfortable reading for those of us involved in construction. Whilst the problems the report identifies are many and the measures needed to address them very significant, there is a single phrase in Dame Judith’s personal foreword which strongly resonates with us and the risk management messages our clients will recognise as all-too-familiar:
“The mind-set of doing things as cheaply as possible and passing on responsibility for problems to others must stop.”
We could not agree more. However, an immediate consequence for consultants across the industry is that they are being asked to collate significant amounts of additional underwriting information as their PI policies come up for renewal. Understandably, social housing was the initial area of specific enquiry, although attention has widened to include other tall buildings, particularly those where people reside overnight.
Initially, insurers were focused on matters relating to cladding and fire safety in general. Many are now intent on understanding the extent to which construction consultants are accepting responsibility for the specification, selection, design, installation, certification of cladding / cladding systems / rain screen systems in buildings. They are particularly focused on multiple occupancy residential mixed use developments and public buildings, especially if above 18m in height, i.e. high rise, and are asking more specific questions in relation to any projects involving Aluminium Composite Material panels.
At this stage the situation surrounding the evolution of building regulations and obligations remains to be determined. The landscape is still evolving and we are unlikely to have greater clarity until the Grenfell Tower Inquiry has concluded its investigations. For the moment, the PI insurance market is by no means co-ordinated in its response to this challenge. What is clear is that each insurer is evaluating their position pending a better understanding of the facts and exposures.
What are the current trends in this area? There are rumours circulating about certain insurers withdrawing from construction PI altogether as a result of the perceived exposures. At the other end of the spectrum, some of the newer entrants (including some relatively new Managing General Agents (MGAs)) appear to be actively promoting the fact that they provide unfettered cover. For how long, and to what extent, remains to be seen.
The potential for PI claims exposures, as a result of actual circumstances or spurious allegations, is clear. There are also situations where an ultimate client wants to rectify/improve fire safety and seeks contributions to do so, and these are often commercial issues, with liability for such costs likely to be influenced by the contractual obligations assumed. This is an important area and our in-house contractual risk management and claims teams are providing clients with coordinated support in this area.
Our own scheme insurers do appear to be taking a pragmatic view and their response to date has been focused and proportionate, as you would expect. In those instances where restrictions in cover are deemed necessary, these are generally very narrow in application and tend to relate specifically to the fire resistant and/or fire retardant characteristics of external cladding systems.
Ultimately, the vast majority of consultants who can demonstrate little or no exposure in this regard, are renewing without any such cover restrictions. As always, good records and clear contractual documentation are proving to be great assets.
With that in mind, it is a prudent risk assessment measure for firms to review their involvement in any projects in which they have had any responsibility for the design, specification, installation of cladding/façade materials, (or where they have assumed supervisory/inspection obligations of others doing so), and/or where they have had a specific role in relation to fire safety. This is particularly the case in relation to high rise buildings where people reside overnight (e.g. multiple occupancy residential, hospitals, hotels, etc.). This work could prove of great significance and benefit when it comes to PI renewal or indeed in the event of any subsequent, related disputes. Much focus has been on previously completed projects with a view to assessing the potential for future claims. There is also the issue of work-in-progress and future work / opportunities to consider. Consultants should carefully assess if:
- the terms and conditions are reasonable – again, we are happy to assist in this assessment;
- all of the services and duties are reasonable and achievable;
- the activities could be considered onerous with the current focus and potential for revised regulation to follow;
- their records and communication of agreed actions and decisions on such work are clear and robust;
- they are satisfied that internal procedures and protocols are up-to-date, including in respect of the performance and systems of any specialist sub-consultants engaged to deliver such work;
- they are comfortable with the extent of contractual liabilities they are being asked to assume, particularly in light of the potential for increased focus from PI insurers.
Clearly, these are a selection of the particular considerations, and the Griffiths & Armour team are available and happy to discuss any specific aspect in greater detail.
In summary, the fact that a firm has been involved in:
- the design/specification/installation of cladding/fire safety systems, or
- the inspection or supervision of such projects
does not automatically require them to notify their PI insurers of a circumstance that might subsequently give rise to a claim. If an internal review or audit highlights any concerns about a specific project then they should talk to their broker to determine whether a precautionary notification to their PI insurers is appropriate in those specific circumstances. Again, we are happy to advise our clients in this regard.
Similarly, if an ultimate client or other third party queries:
- the consultants role in relation to cladding/fire safety on a project, or
- a project’s compliance with Building Regulations or other guidelines,
and if after subsequent consideration, the consultant is in anyway concerned, they should liaise with their broker. Other than the specific project details, central to determining the appropriate action is the definition of a potential claim circumstance within the PI policy, and we recommend close liaison with your broker in that assessment.
If you have any questions relating to this article or would like to discuss the subject matter in more detail, please get in touch using the contact details below and we will be happy to speak with you.
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