IMPORTANT INFORMATION ALERT:
Griffiths & Armour Europe DAC
Our Irish Professional Indemnity
Renewal of our Scheme facilities
Considering conditions within the PI insurance market, we are particularly pleased to have secured insurers’ ongoing support for our Scheme facilities, which were renewed on 1st November 2020. This is a different exercise from the renewal of your individual policies; it is essentially the renewal of the overall framework within which your individual policies are placed throughout the coming year.
Like most things in 2020, the renewal of our Schemes has not been achieved without both considerable difficulty and a degree of change. The negotiations we have had on behalf of our family of clients were without doubt the most intense and detailed in living memory. That arose because of two key factors:
- The continuing deterioration in the PI insurance market which, as we have regularly commented on over the last 18 months, is in a phase of marked and perhaps transformational change; and
- Our steadfast refusal to accept disproportionate coverage restrictions .
We don’t, however, shy away from the fact that our community of clients will face significant challenges ahead. And our insurance partners equally so.
It is because of the commitment shown over the last 70 or so years, by both our clients and our key insurance partners, that we have successfully secured ongoing support for our facilities at a time when all insurers are looking to severely restrict the cover they will offer, the areas of work they will underwrite and the volume of business that they will consider taking on. That is of course if they are still involved in underwriting PI insurance in the first place. Many are not.
Before looking in detail at the renewal of our facilities, and particularly for those who have missed some of our other publications over the last year or so warning of trouble ahead, it is perhaps timely to go back to the beginning of this insurance phase and explain:
- Why this renewal has been so challenging; and
- What local factors are currently impacting on insurers’ appetite.
The PI insurance market – A broader perspective
As you will be aware from previous communications, the PI market is currently suffering from a severe shortage of capacity; indeed, many industry commentators have talked of a looming ‘capacity crisis’. At a very basic level, there simply isn’t enough capacity within the insurance market to deal with the level of demand; whether that is the number of firms seeking PI insurance or the amount of cover they are looking to hold.
In late 2019, we produced a paper ‘The Supermarket Revisited’. The introduction was –
‘2019 … What lies ahead and beyond?
Anyone involved in the business of arranging PI insurance will recognise that the market has been subject to too much downward pressure for too long.
Whichever features of the PI landscape you consider important, the pressures have been there. Pressure to reduce pricing. Pressure to broaden coverage. Pressure to reduce excesses. And as with any spring under too much compression, at some point that downward pressure is released and the spring snaps back. How far and how fast depends on the composition of the spring and the downward force applied. Apply the analogy to the insurance market and the results are fairly similar.
The insurers that have contrived to put themselves under the greatest pressure, by cutting rates too far for example, will react more quickly and more severely than those who have tread a more moderate path. Recent entrants to the PI market are realising all-too-quickly that not all springs snap back to their natural state.
Some simply break. In insurance market terms, this is manifested in insurer withdrawal from the market, a phenomenon not seen in construction PI for 10 years or more…’
Since, then the predicted withdrawal of insurers from the PI market has accelerated, resulting in a market today which is severely short of insurer capital. Put another way, there are not many insurers left. The spring has been fully released and for some it has indeed broken.
Weekly, we are encountering firms that have been unable to source insurance protection, are struggling to achieve the indemnity limits they previously held or are facing PI premium increases of several hundred percent.
The insurers who remain in this sector are largely free to pick who they choose to work with and on what terms. Those that have tried to take that ‘moderate path’ and continue to secure market support face a number of dilemmas:
- There is a need to boost the premium pot available to meet the ever-increasing claims burden that the insurance market has to bear. But it cannot be right to indiscriminately triple or quadruple premiums as some markets have done.
- There is a need to recognise the potentially catastrophic impact of ‘fire safety’ claims on the PI market and protect insurers from their worst fears of insolvency. But it cannot be right to simply exclude all cover for this activity as many have done.
- There is a need to tread the potentially difficult journey ahead with caution, delicate balance and foresight. That considered approach is one that we recommend – and we hope you agree that is what we have done. As custodians of the safe haven that many of our clients have relied upon for decades, we can’t shrink from warning again of the troubles ahead and this document is part of a series of publications that we’ll be issuing over the next few months covering the market changes we can expect through 2021 and beyond.
As mentioned above, many of the challenges faced by the PI market are global. They are not peculiar to Ireland, or indeed the UK, but there are particular concerns and some broader issues that are more pronounced locally.
In construction PI, liabilities are notoriously long-tail and quite often, a very small number of claims can determine the performance of an insurer’s portfolio or the market as a whole. This is not a consideration that is exclusive to Ireland but there is increased volatility given:
- the relative scale of the local market,
- the disproportionate impact of larger claims and
- the risk of aggregation, where insurers may be insuring several parties on the same project.
Historically, we have also been reliant upon UK insurers to provide capacity. Brexit and the removal of passporting rights presents some challenges, particularly in the short-term, and perhaps ultimately a further reduction in supply, but Ireland is also often seen as ‘a difficult place to do business’:
- The uncertainty regarding limitation periods and the impact of legacy risk;
- The time and cost associated with defending claims;
- The potential for multi-party actions;
- The lessons of the last decade and the impact of the Civil Liability Act (the 1% rule).
- The ‘risk dumping’ mentality with risk being forced down the supply chain.
All of these are topics that we have covered previously that have the potential to feed into a negative perception at a time when we need to be working hard to attract and retain the support of insurers.
On a positive note, the Building Control Amendment Regulations (BC(A)R) seem to have led to a general improvement in standards and have begun to address many of the issues that legislators in the UK, and other jurisdictions, are still wrestling with.
It is also encouraging that there is an acknowledgement of the issues that exist within the PI market locally. The Office of Government Procurement (OGP) recently brought together representatives from the insurance and construction sectors to discuss the current challenges and we were pleased to be asked to provide the opening statement to advocate on behalf of our clients and construction professionals more generally. As a consequence of that engagement, OGP have committed to reviewing their approach in certain areas.
2020 Scheme Renewal
From our own encounters with individual firms, engagement with the OGP and local professional bodies, we are aware that some contractors and consultants are now struggling to source PI cover. Many are reporting an inability to secure anything more than aggregate cover with wide-ranging restrictions whilst others are mentioning premium increases as high as 600%.
Against that backdrop, we knew that negotiations around the renewal of our Schemes were likely to be the most difficult in a generation. Despite that, we have retained insurer support for our facilities and at a time when all Insurers are looking to restrict cover, the breadth of protection under those facilities continues to be broader than that generally available in the insurance market. But we are not completely immune from conditions within the wider market and we fully appreciate the fact that 2021 is going to present challenges in a number of areas:
Fire safety risks will continue to dominate discussions; the tragic fire at Grenfell Tower in London has understandably raised the profile of such issues and resulted in more detailed underwriting assessments. The combustibility of cladding is possibly less of a concern in Ireland given the nature of our building stock, but fire safety is a recurring theme and particularly so when it comes to legacy risk and ‘Celtic Tiger’ era developments. But what these developments, and indeed Grenfell, have brought home to insurers is the catastrophic nature of the risk, the unknown perils that can exist and the need for them to manage their potential portfolio exposure.
As a result, the wider market is seeing restrictions being introduced but to date, there is no ‘market standard’ approach as such; some insurers simply avoid risks that have exposure to multi-unit developments, others will look to restrict cover to aggregate and some will apply inner limits etc. An increasing number will not underwrite ‘fire safety’ cover at any price. The insurers who take that last view are far from being on the ‘fringe’.
There will be some insurers who may continue to provide cover on an ‘each and every claim’ basis, but that would tend to be under an ‘off the shelf’ policy wording that would not provide sufficient protection in other areas, such as for liability assumed under contract. There are clear concerns around the long-term viability of such products too. It is our view that policies which continue to offer this cover ought to be viewed with caution and some concern as to their likely availability in the medium term.
In assessing the Scheme position on cover for fire safety risks, we need therefore to do so in the context of the conditions that prevail within the PI Insurance market generally. Our Scheme is not immune from what is happening in the wider market and the difficulty we have faced in resisting insurers efforts to introduce some restriction is that without conceding some ground we are all but certain to lose their support altogether. It is not a hyperbole to suggest that without some sort of action in this area, our Schemes for construction consultants would not have renewed.
Of course, our Schemes are more than just about measuring the extent to which we can insure fire safety. That is a critical factor and something bordering on a ‘public good’ given the support it gives to those remediating dangerous buildings. But any effective PI policy is about more than the cover afforded for fire safety. It is a question of trying to achieve the right balance between a number of factors, including:
- The ability of the insurer to pay claims and their longer-term commitment to this class of business.
- The breadth of cover afforded under the policy wording for everything else.
- The premium charged.
- The cover provided for fire safety risks and how that stacks up when measured against perceived or actual exposures of any individual client.
- For us, there is the additional factor of the insurer’s willingness to sign up to our unique service proposition, that has proven to reliably support our clients for 70 years.
With all of that in mind, we are pleased to confirm that insurers are continuing to follow the course they began taking in 2020. As a result, the majority of our clients will continue to benefit from cover for ‘Fire Safety Notifications’ on an aggregate, costs inclusive basis with the uninsured excess applicable to costs.
– This means that any losses or costs directly or indirectly relating to:
- the combustibility or fire performance of cladding or roofing systems;
- any internal fire protection systems; and
- any aspect of the fire safety or fire performance of a building or structure will benefit from a single aggregate limit of indemnity only with the uninsured excess applying to costs.
– For those clients who have inner limits of indemnity, special excess provisions or outright exclusions, those will remain, but any ‘bespoke’ wording will generally be no wider than that outlined above.
In delivering this, we are sorry to have lost several of our insurance partners because of their inability to support this refined extent of cover, but we certainly don’t apologise for securing cover that allows our clients to be able to continue to work in these areas.
The test for us is whether the approach being adopted by insurers is reasonable and proportionate. One which enables insurers to protect their position to some degree across their business, whilst still providing significant protection in this area and preserving the other crucial aspects of cover.
For those operating in the UK, we also need to alert you to the fact that a blanket exclusion will be applied to each of your policies at renewal with the effect that any liability arising from completion of the EWS1 form (or any revision to it) completed after the 1st December 2020 will be excluded. It is therefore critical that if you are involved in the EWS1 process of certifying buildings, that you contact your usual G&A account handler.
In terms of background, we wrote at some length in August about the problems with the EWS1 process and warned of the significant changes in the market and PI insurers dim view of the liabilities it imposes. Our advice was that given the high degree of uncertainty regarding the market’s reaction, clients should not sign the form under any circumstances. For those of you who missed that publication, we would urge you to read it here.
The intervening months have done nothing to change insurers’ views on the dangers they see in the risks that might be inadvertently assumed by their clients and ultimately themselves. There is a general market-wide shift towards excluding all liability attached to the EWS1 form or similar forms.
The fact that insurers have taken this action in respect of a single form speaks volumes. We do not believe that there has ever been a market move to exclude a specific document from PI cover in the hundred or so years that construction PI has existed as a class of business.
- In respect of any EWS1 form signed after the 1st December 2020, our Scheme policies will exclude insurer’s liability for all claims arising from the completion of EWS1 (or any revision to it) unless this has been specifically agreed with insurers.
- In respect of any EWS1 form (whenever it was signed), our Scheme policies will exclude any liability arising under EWS1 (or any revision) that imposes a greater or longer lasting benefit than the standard form published by the Building Societies Association, RICS and UK Finance.
We believe there are ways in which certification can be made whilst maintaining insurer support and have made representations to various regulatory and Government parties as to how that might be done. Sadly, this is still an area which is ripe for clarification and we continue to work to arrive at a position which allows critical fire safety work to be undertaken, whilst preserving the insurance market’s support for the potential liabilities that flow from that work. Failing that, there are more radical options and we continue to advise as to the shape and structure of those potential external solutions.
For now, it is absolutely critical that you do not sign EWS1 or any revision, or any similar document without first speaking to your regular G&A contact.
The cover we provide in every other respect is largely unchanged from previous years – indeed there are several minor improvements to it – and the fact that we continue to deliver a wide ‘legal liability’ policy with few exclusions of contractual liability is testament to everyone involved in the process.
Budgeting for increased premium
2021 will see further increases in premium. Whilst the impact on any individual client will to some extent depend upon the specific profile of that firm, insurers are already signalling their intentions for a step-change in pricing and we offer some advice on appropriate next steps.
In September we issued our Report ‘The Claims Context’, which reviews the ten highest value settlements concluded under our construction facilities during the calendar year 2019. It considers one significant tier of settlements, to which we need to overlay the attritional effects of the many further tiers of claims that sit beneath and are a significant factor in themselves.
Each claim tells a different story and helps to illustrate that whilst some claims grow out of a toxic mix of coexistent factors, other high value claims can be traced back to a single innocuous event which was sufficient to cause a major problem. The conclusion is that the largest claims are becoming larger and attritional claims are not reducing in volume.
This is reinforcing a view held for 10 years or more that premium levels have fallen to a level which are inadequate to offer a realistic prospect of underwriting profit and additional correction is now urgently required.
This sits within a context where wider market analysts are suggesting price increases between 50% and 100% as being a realistic assessment for 2021.
For clients renewing under our Scheme facilities, it will still be the case that individual renewals will turn on their individual circumstances. That being said, we would suggest that budgeting for potential increases of 50% would not be an unreasonable starting point.
The reasons ‘why we are where we are’ could easily swallow up this entire communication, so please forgive our providing a significantly abridged version. If you want to read about the market context in more detail, please click here for ‘The Supermarket Revisited’ or here for extracts from our ‘A Brave New World’ publication.
We will be issuing further guidance and context to all of these issues in the forthcoming months. For now, however, we leave you with the concluding 5-point plan from a chapter in our ‘A Brave New World’ series on steps to take now to deal with the problems ahead:
1. Plan Early
Start – and expect to be prompted to start – discussions early. In 2021, time will be an asset not a luxury as renewals are going to take longer to conduct and to finalise than at any other point in the last two decades. Even ‘straightforward’ smaller and medium sized risks (say with fees under €1M and undertaking ‘plain vanilla’ activity) should expect to be engaging with their broker at least two months ahead of renewal. For complex risks buying large limits, unusual risks, or firms impacted by claims, more time will be required. Meaningful engagement can be required six months or more ahead of renewal date.
2. Expect greater information requirements
Insurers are demanding more data to provide renewal terms. If you are undertaking any ‘higher risk’ work, then they will have further questions and perhaps separate forms. Higher risk is an ill-defined phrase, but if we were to come up with a list of the usual suspects this includes:
- Façade engineering
- Any involvement in cladding
- Any risk with pollution exposures
- Any work involving surveying or valuation of residential or commercial property
- Swimming pools
- Data Centres
- Renewable Energy
- Any large or complex projects, particularly where this is out of your normal scope.
Importantly, don’t regard it as necessarily a bad thing that you’re providing substantial detail to describe these activities. Insurers will (unless told otherwise) think the worst. If we can demonstrate otherwise, this can unlock significant underwriting differentials, and even discounts by properly explaining what it is you do – or don’t do.
3. Understand your contract risk
Contract risk management is always a topic of interest and insurers will ask how you go about selling your services. Do you use your own standard forms or those of the institutions (ACEI, Engineers Ireland, RIAI, SCSI etc.)? If bespoke contracts are used (and we all know they are the overwhelming majority) what do you do about contract vetting them for acceptability? Is your broker involved? Do you routinely include appropriate limitations and exclusions? Increasingly importantly, can you provide any statistics to support any of this?
4. Be prepared
If you’ve had claims, a post-claim review may be recommended and/or required and, indeed, it could be beneficial to draw insurers’ attention to the particular characteristics of the claim and the remedial measures taken to prevent them occurring again.
5. Present yourself properly
We firmly believe that your broker should be helping you understand the particular risks that your business will be perceived to present to the market and help you to construct a narrative around why those risks have been identified, understood and mitigated. Do not underestimate the value of such a written narrative or indeed a general overview of the way in which your business operates. If you can tell a good story about how you run your business, you need to make sure that your insurer hears it. At the end of the day, costs are going up, so the more preparation and detail you can put into understanding insurers’ concerns and, more importantly, addressing those concerns, the better.
We appreciate that there is a significant amount to digest. With that in mind, we plan and expect to be in detailed contact with our clients in the weeks and months ahead. In the lead up to your renewal we will discuss the appropriate approach and strategy for your business. In many ways, that is the most significant component in this communication: that we have secured the framework necessary to commit to you that we can continue to offer the proven and trusted specification to which you have become accustomed.
In the meantime, if there is any aspect of this note that you would like to discuss, please get in touch with your usual Griffiths & Armour client or click below to submit your enquiry.