Construction Liability:
BIBA calls for change
As we report here, the British Insurance Brokers’ Association is again committing to try to improve the PI insurance landscape for construction professionals.
This goal continues as one of their central themes for 2023. In conversation with Paul Berg, we are joined by BIBA’s head of general insurance, Alastair Blundell, and G&A’s own Craig Roberts for a Q&A session on why construction PI insurance is so high up the trade body’s agenda.
Paul Berg
Griffiths & Armour Partner and Group Director – Professional Risks Division
Craig Roberts
Griffiths & Armour Professional Risks Director
Alastair Blundell
BIBA Head of General Insurance
Page Contents
Paul:
Alastair, welcome and thank you for agreeing to join us. I’m sure our clients will appreciate the broader insight you can bring to a subject that’s very close to them. Just setting the scene, BIBA’s manifesto published last month contains a call to action in support of construction professionals; why has this area featured so prominently?
Alastair:
Thanks for having me, Paul. BIBA’s involvement with PI related fire safety issues stems back to, I think, 2019 when we were first alerted to serious issues in the market. At that time many brokers were asking us for help in their efforts to place construction related business.
The volume of calls and messages we were receiving relating to PI was completely unprecedented and it seemed to us that there was a huge issue for some brokers who simply couldn’t find insurers willing to help. The seriousness of the underlying problem was also unusual – the insurance our members couldn’t find, or at least not at a reasonable cost – was to allow their customers to remediate dangerous buildings.
Insurance is important, of course it is, but this was a matter of life and death for tens, if not hundreds, of thousands of people still trapped into living in dangerous buildings. That, ultimately, is what drove us to take up the debate and highlight the problem to Government to see if a coordinated solution was available.
Paul:
Craig, BIBA’s involvement has been instrumental in bringing the problems in the wider PI market to the attention of senior government ministers; where do we fit in to these clearly vital engagements?
Craig:
Obviously, we have plenty of technical insight into the problems that our clients and our insurance partners face, but never before has there really been a platform to lay those problems out at the level we have been doing over the last two years or so.
Since getting involved, our focus has been to provide technical support to BIBA to allow them to make the case on our clients’ and the wider professions’ behalf. I’d certainly echo Alastair’s final point though: throughout the last few years, the aspect driving us more than anything has been the need to do whatever small thing we can to help those people living in dangerous buildings.
Although the picture is far more nuanced than the sound bites that we read in the press, we can’t and shouldn’t look to get away from that central issue.
Paul:
Alastair, so what is it exactly that BIBA and G&A have been doing?
Alastair:
On reflection, looking back to 2020, we didn’t appreciate the scale and complexity of the issues we were trying to address. In the early days, we assumed that there was likely to be some technical market issue at the heart of the problem and which was capable of being remedied on a macro insurance level. As it has transpired, we found quickly that we were grappling with some fairly fundamental aspects of the way the construction market works and, in particular, how that market was failing many construction professionals. The number of moving parts and the complexity of the issues was immense.
We were not alone in underestimating the difficulties faced by the sector. Those early days in 2020 were actually more about us explaining how the PI market worked and the nature of the difficulties the professions were facing to our colleagues in Government. Only following that significant education exercise to raise awareness, and through working with G&A, other members and professional bodies and institutions, could we then move to a second phase of lobbying those in Government who have the ability to help the professions secure the cover they need.
That lobbying saw some initial success and we were pleased that Government has introduced the EWS1 insurance scheme which is, to our knowledge, the first such intervention of its type. We recognise, though, that this is only a small part of a much bigger picture, but we had to start somewhere. Our aim is to next look at the market for those working on remediation projects in support of the Government’s BSF (Building Safety Fund) scheme.
Paul:
Craig, what is that bigger picture?
Craig:
We can’t hope to do it justice today, but the sum of the parts of what we’re calling for is nothing more, or less, than a revolution in the legal and insurance environment for everyone working in construction. This isn’t about the usual arguments which pit consultant against contractor, or client against design team: it’s about changing, for the better, the environment for everyone.
As was said at one of our recent industry roundtables, the end of this journey needs to be not having created standard contracts, or having a law on proportionate liability, or even increasing fees. The end point needs to be a world in which construction professionals are highly valued and that the role sits alongside the most admired professions in society.
That must be the destination in order to create a sustainable future for those working in construction. At least for us, the journey to get there is about making some headway on the legal and insurance factors that lie in the way. This aspect alone contains many necessary steps relating to how risk is allocated, how that risk is insured and what the law across the UK and Ireland says. These are some significant challenges and that’s why we’re working with like-minded organisations to move some of these ideas forward.
But it is, of course, much more than an insurance or legal problem. Having a future where ‘engineers’ and ‘architects’ (and there’ll come a point where we’ll need to be specific about what roles we mean) are viewed by the public in the same manner as lawyers, or accountants, is about more than the legal or insurance framework. It’s about a whole host of factors which determine how the professions are viewed by the public. That means an industry-wide drive to address all sorts of fundamental questions from the ethical conduct of the UK engineering and architectural professions, reinventing the way procurement is undertaken and a transformational shift in how we measure value.
Paul:
Alastair, we’ve seen at the end of January an interview from Michael Gove MP where he appears to accept some responsibility of Government for the broader failings in regulation. What do you think this tells us?
Alastair:
Gove’s positioning is interesting, and the mea culpa is certainly the first time there has been public acknowledgement of the failings in regulation. We’ve all known since fairly early on in the engagement that there were failings in regulation, but I’m sure the families in particular of those that lost their lives that night [in the disaster at Grenfell] will welcome the admission and hope that valuable lessons have been learned.
The other aspect of Gove’s statement that’s sure to attract interest from commentators is his view that sins of omission (i.e. Government’s failure to regulate) are of a different order of magnitude from the sins of profiteering (i.e. bad actors in the construction industry gaming the rules for profit over safety). I think that’s hard to argue against.
Time will tell whether or not Sir Martin Moore-Bick agrees with that analysis in his report following the public inquiry into Grenfell due later this year, but I think it’s a safe bet that we will see some fairly damning criticism laid against the construction industry. The question for us is will that lead to a further contraction of the market just as it seems to at last be settling down a little?
Paul:
Craig, any thoughts on Mr Gove’s statement?
Craig:
The ‘polluter pays’ principle put forward by Government resonates in a situation where identifying the ‘polluter’ is clear cut. On most construction projects, that is rarely the case as there is an awful lot of complexity, many interfaces and very often a degree of responsibility amongst the parties that runs a broad spectrum.
Identifying the ‘polluter(s)’ and ensuring that they share the burden in proportion to their blame is not always straightforward. Very often, the most capable and least culpable members of the team ultimately shoulder the biggest financial burden. There are circumstances where there might be an argument that this is the ‘right’ outcome from a societal point of view. Why should the ‘innocent’ individuals suffer when insurance monies might be available to stop them being out of pocket? That position does, however, come with many consequences (some unintended) and costs, both direct and indirect. Today, this lies against an insurance backdrop that means recovery, particularly for fire safety matters, is much restricted that it was; if there is any cover at all.
It’s been almost 30 years since the UK Government looked seriously at the law on joint and several liability. Given the significant changes in the legal landscape that underpins the construction industry and the changes that might be coming with the Building Safety Act, perhaps it is now time we considered whether the basis on which we apportion liability still reaches the right outcomes.
Paul:
It seems that Craig is rightly highlighting the risk that a professional consultant’s proximity in contract to a ‘bad actor’ can lead to real and significant exposure. Alastair, do you agree with that and what’s the solution?
Alastair:
We’re going to see some really egregious cases coming where developers, builders and professionals have failed, or have cut corners and, as Craig says, those guilty parties should pay. And the cost to those who have committed the most extreme offences might be more than money. But putting those to one side, the bill associated with ‘fixing’ the systemic problems that are industry-wide associated with fire safety failings will be monumental, far bigger than the entire PI market combined.
With responsibility for the crisis resting with parties as varied as Government, regulators, manufacturers, testing houses, construction firms, developers, architects, construction professionals, building control and the insurance market as a whole, there are a huge number of parties involved. The ‘crisis’ also manifests itself in many forms, from properties with defects which are relatively minor, through to whole blocks which are barely habitable, or outright dangerous.
That’s why we’re advocating a multi-track approach which should see Government back the remediation of dangerous buildings first. In order to speed up that remediation and allow industry to help with that work, Government needs to underwrite the fire safety risks associated with that work, in the form of an insurance or indemnity scheme. Professionals who are working to fix the crisis need to be protected from the potentially disproportionate risk of doing so. Absent conventional insurance protection, the Government must step in to underwrite this risk.
For less critically urgent work, the insurance and liability requirements of the BSF need to be amended to more proportionately reflect the risk and the cover that is actually available in the market. Finally, we need to rally ourselves for the long-haul which will be changing the environment. The reason that the construction industry is in this position is because of the ‘race to the bottom’. Rather than tinkering around the edges, we need to bring some real structural reform to the legal, commercial and operational environment for those designing and constructing the built environment.
Paul:
These thoughts chime with the risk awareness guidance we have compiled, communicated and discussed at length with clients for decades. The feeling we encountered was it was too big for one client or even one profession to tackle. Craig, what is your ‘next generation’ lens?
Craig:
Absolutely agree with you both. That we need to look to the fundamental problems in the industry is a view we have long since held, and critically, shared with those who will listen. Our role in the food chain, as insurance intermediaries, does tend to see us view the world as having liability problems and insurance solutions which, even with initiatives like reforming joint and several liability, is probably not a sufficiently high-level view to get us out of the weeds.
Dame Judith Hackitt was right to identify ‘culture change’ as being critical to improving quality and safety in constructions. As I’ve said, we would argue that a necessary corollary of that culture change is fundamental shift in the position of the professional team.
The Building Safety Act ought to be the once in a generation chance to provide the legislative framework that mandates for some of that change. As we have said before the risk is that rather than transform the environment, the BSA simply overlays more regulation over what already exists. If that transpires to be the effective outcome, then the future becomes very difficult indeed.
Paul:
Alastair, I suppose with BIBA being a key flag bearer for change, what can we all do to help?
Alastair:
A large part of what we’ve being doing together over the last three years has been to try to explain, often to non-specialists, a really complex set of issues. Then, most significantly, clearly illustrating the consequences of doing nothing about them. Hard data about what was going on within the sector too was (and still is) crucial.
Both we and organisations like the Construction Leadership Council particularly the working group on PI, have been feeding that data to Ministers. Articulating that has been more than half the battle and we’re grateful for the support of G&A in making our case. Going forward, only collective and concerted action will secure change. We have been pleased to work with many industry bodies and will continue to act as a bridge between those specialists and our colleagues in Government to make the case for reform.
Paul:
Of course, Alastair, the BIBA Manifesto is not just about problems in PI insurance.
There are perhaps even greater challenges in there relating to the continuing economic uncertainty?
Alastair:
That’s right. Our Manifesto does highlight and reflect a varied range of concerns that the wider business community have brought to our attention. The final quarter of 2022 saw us undertake a survey of companies at the larger end of SME businesses and above to gauge what was keeping them awake at night. Unsurprisingly, economic factors headed those concerns with inflation and a broadening financial crisis occupying the number one and two slots respectively. Of no surprise to your clients will be the fact that supply chain disruption and a workforce shortage came in at numbers five and seven respectively.
Our manifesto was an attempt to both highlight the importance of businesses taking, where possible, some action to address these risks, but also for us to offer some solutions as to how they might be addressed.
A key theme running throughout our Manifesto was to voice the concerns of insurance buyers everywhere about the cost of their covers and the careful balance between adequate insurance protection and value for money. We found unquestionable evidence of customers looking to reduce their insurance protection because of affordability concerns which, given the potential for recession over the next year or so, leaves those buying certain classes of insurance, such as PI, hugely vulnerable to uninsured claims. From an economic sustainability perspective, when the incidence in PI claims is likely to spike, that is not the time to cut cover unless it’s completely unavoidable.
Paul:
Getting that balance right between business protection and affordability is a hugely difficult issue and one I know our clients have been particularly grappling with over the last two or three years.
Alastair, what are the areas that BIBA hopes to address to help out?
Alastair:
I think the first strand is education: helping firms understand the nature of and the need for key insurance covers along with an understanding on how to make a claim under those covers. Although I know this isn’t a problem for G&A clients, many SMEs may not benefit from the detailed and tailored advice that you provide. Without that insight, it’s easy to view insurance as an unnecessary overhead, rather than an essential tool in the kit of any successful business.
Second, I think there are some very big macro-level issues we’re lobbying on around the level of Insurance Premium Tax and the personal injury discount rate. IPT in the UK has grown from delivering £3bn to the exchequer in 2015 to a record £6.6bn today. At the very least, we need a commitment from Government that the rate is frozen for the remainder of this Parliament, though we’d like to see some reform of what is ultimately an indirect tax on business.
Third, the burden of the regulatory environment of business needs to be reduced. From introducing some element of ‘proportionality’ into the new statutory ‘Protect’ Duty – now known as Martyn’s Law, to cutting the cost of doing business, there are many areas where Government can intervene to reduce the cost of doing business in the UK.
Paul:
I think you’d find consensus with that opinion around a table of any of our clients Alastair!
What of the future, what does your scan of the horizon tell us is coming?
Alastair:
I think for us some interesting areas are around the developing class of business which is cyber cover – just how that is going to develop in responding to new threats which today don’t exist? There is a huge protection gap at the moment between exposure and insurance take-up and that is only going to grow. ESG continues to fall under scrutiny both from investors and employees, particularly the younger generation, and we all need to be cognisant of the changing landscape in this regard.
Developments in the motor market around automation – while perhaps not at the forefront of your clients’ agendas – will continue to require innovation.
Paul:
Craig, any final thoughts on what’s coming down the tracks?
Craig:
Samuel Johnson said that change, even for the better, comes with inconvenience. I think the years ahead might see that sentiment become a familiar one as we work through the unknown thicket of change that the BSA provides, whilst technological changes continue apace, and industry continues to grapple with necessary innovations to address climate change.
These challenges aside, I think we have to look at the potential for positives from each; all of these challenges will present our clients with many opportunities to grow and innovate, whilst (hopefully) refocusing attention on delivering better quality outcomes.
Let’s not forget our recent troubles and our clients’ collective responses either. Our construction clients have, by and large, successfully traded through some of the most difficult conditions ever seen. With significant insurance cost rises, the unprecedented crisis of Covid and the impact of the war in Ukraine, there have been any number of challenges well beyond the normal difficulties of working in the sector. That the vast majority of our clients are still here and trading well is testament to their dedication and hard work. That resilience coupled with the many opportunities ahead should make the next few years an interesting and rewarding time to be involved in UK construction.
Paul:
Well, thank you Alastair and Craig for your insight. 2023 is shaping up to be a really crucial year for us all and it’s good to hear that substantive conversations are ongoing at the highest levels to seek a more sustainable and proportionate future for those active in the sector. We will of course continue to assist where we can and keep our clients updated as to the challenges and opportunities that lie ahead.
