PII Scheme Renewal 2021 | Griffiths & Armour

Background and context

That the current PI market for construction risks is a challenging one needs little introduction. Recent surveys from the Construction Leadership Council (“CLC”) and RIBA all point to construction firms struggling to access the PI cover required to meet their contractual obligations at a reasonable cost, with many reporting very significant increases in premiums, excess requirements and the imposition of new coverage exclusions.

The turmoil reflected in the CLC and RIBA surveys shows few signs of improvement. What little optimism currently exists could prove very short lived if the cost of claims relating to fire safety in buildings starts to grow, as many commentators in the insurance market expect it will. The catastrophic potential of claims in this area is a major reason that fire safety exposures continue to dominate the agenda at all UK construction insurers, with the focus being to further reduce or exclude cover for fire safety matters. We report in more detail on these continuing developments below.

It is therefore in the face of the most challenging PI insurance market conditions for over 20 years, that we are pleased to confirm that our construction Scheme facilities have been renewed for a further 12 month period, from 1st November 2021. As most readers will know, this annual negotiation renews the framework under which your individual PI policies are placed and sets the Scheme insurers’ broad strategy for the insurance year ahead.

Perhaps even more so than last year, those negotiations were marked by very difficult discussions on some complex issues:

  • The continuing capacity challenges in the PI insurance market and the reshaping of appetites for UK construction risks amongst those insurers prepared to continue to offer PI cover.
  • What level of macro-level pricing changes are appropriate to ensure our Scheme can continue to deliver on its promises of providing broad, sustainable protection which is both effective and value for money.
  • The wider PI insurance market response to the need to clarify their cyber liability exposures.
  • The continuing ‘fire safety crisis’ in the construction industry and the insurance markets’ reactions to it. There is undoubtably an increased awareness today of the systemic problems in certain parts of the industry, as has been only too clearly highlighted by the Grenfell Tower inquiry. This has served to reinforce the need for us to continue to best advise our clients in the context of what does appear to be a much more widespread problem than initially feared, particularly on the materials supply side.

Securing the necessary underwriting support has been a challenging exercise for 2022. There have been some major losses of insurer capacity along the way, as some underwriters believed that the protection we sought to offer was too great or the pricing structure insufficient. Walking the tightrope between, on the one hand, ensuring that we have insurers of sufficient quality to meet the claims promises we make, whilst on the other, ensuring that we continue to offer a value for money product is more difficult than ever.

In order to ensure that the more extreme insurance market responses do not become a feature of our Scheme, we outline below the various changes to our cover specification that we have negotiated with our insurance partners. Inevitably, there is an element of ‘give and take’ to the proposals but in the round, having regard to the market alternatives in each area, we feel that the compromises struck see our clients well placed to take advantage of what the future has to offer, whilst providing protection against the problems of the past.

Insurer changes

First, we are taking the opportunity to restructure the insurer panels that support our various facilities. These changes are evolutionary rather than revolutionary but will bring with them some change to our lead insurer markets. From 1st November, we are delighted to report that AXIS Specialty Europe SE (‘AXIS’) will join Arch Insurance to take on the role of a lead underwriter for significant proportions of our UK and Irish construction facilities.

AXIS have been a co-insurer on our Scheme facilities for 5-years and our personal relationships with their specialist UK PI underwriting team extends back over 20-years. They bring with them a rich depth of underwriting resource, backed up by a strong and growing appetite for UK construction risks and an enviable A+ rated financial position. As part of the AXIS Capital Holdings group of businesses, they underwrite some US$1.4bn of professional lines business, with US$26bn of assets globally.

We view this change as entirely positive and look forward to being able to continue to provide our clients with the reassurance of the Scheme specification many have known for several decades. Whilst the identity of the lead insurer may change, the underwriting, claims and risk management services that we provide will not. Our commitment to ensuring that your PI policy provides the broadest sustainable level of cover, backed up by our unique claims handling specification, continues as before.

Our relationship with RSA will continue in some form albeit that they will be relinquishing a lead insurer position. The basis of that relationship will become clearer as the RSA Group decides on its key areas of focus following the completion of the sale to its Danish and Canadian buyers.

Predictions for the cost of cover

Inevitably, the turmoil many of you will have heard about in the wider PI market has also impacted our Scheme and together as we have worked through the last 12 months, we have faced the challenge of an insurer led drive for increased premium.

We recognise that no increase in cost was welcome, particularly at a time where we faced unprecedented economic uncertainty whilst managing the consequences of a global pandemic. But such an increase was a necessary step to continue to attract sufficient quality insurance capital and has ensured that we continue to meet the promises made as part of our long-term offering.

As a collective, our Scheme clients have all delivered on the need to increase the premium volume to meet the claims burden and our Scheme is in a stronger position to weather the almost certain (but ultimately unknown) volume of claims likely to arise from particular areas of concern in the years ahead.

The work we have undertaken means that whilst we’re certainly not out of the hard market yet, there are signs of better days ahead. Consequently, this year, whilst there will be a general aim for a modest increase in rates across the Scheme portfolio, the level of increase will be much less than last year. We also expect that we will start to see the Scheme underwriters having more ability to exercise underwriting judgement on individual cases.

Coverage changes

Whether the vision of those better days come to pass in 2022/23 and beyond turns almost completely on one issue: fire safety.  When the Inquiry into the tragedy at Grenfell tower concludes next year, we are likely to then begin to understand the scale and potential impact of the problems created over the last several decades by how, as a nation, the design and construction of our built environment has been procured.

Having regard to the potential for the severity of these risks to create a grave threat to the ability to continue to offer our Scheme specification, there will be a notable coverage change applicable to all Scheme renewals effective from your next individual policy renewal date.

There will also be some policy amendments to reflect the ever-changing position on cyber liability exposures, led by moves from the industry regulator, who have called for clarification. Again, these will take effect from your next individual policy renewal date.

We address each in turn below:

Fire Safety

We continue to engage with industry, regulators and Government about the continuing inability of the general PI insurance market to offer cover that adequately transfers ‘fire safety’ risks from consultants’ and contractors’ balance sheets to insurers.

It has become our increasing belief that the improvement of the legal, commercial and operational conditions for those involved in designing and constructing the built environment is the only practical and sustainable long-term solution to this problem. On behalf of our clients, we have communicated that belief directly and unequivocally to Government, as well as those professional and trade associations that we advise.

We recognise that our recommended changes to the ‘environmental conditions’ for consultants, along with the opportunity the Building Safety Bill brings to introduce some of them, will not solve the immediate crisis for those affected by dangerous buildings. Having regard to our research of the available cover in the marketplace and the liabilities that consultants are still being asked to assume, we are forced to conclude that the only option that will deliver the required clarity and financial support for those undertaking this urgent work is Government intervention. We will continue to update you separately on these specific issues, as this area would simply consume all the space available for this update.

Whilst these particular aspects of fire safety cover will be of more relevance to those working in England and Wales, insurers’ concerns are not limited to any one jurisdiction or building type.  Fire safety and indeed the broader question of the quality of buildings is now a global issue, that has far reaching implications for consultants and contractors operating across and indeed outside the UK and Ireland.

The typical insurer response

In the here and now, there is little doubt that the insurance market has continued to reduce and remove cover in relation to fire safety liabilities. Some actions have been clear and explicit, others more subtle but with real implication.

We have seen policy language from various bodies, such as the RICS and the International Underwriting Association (‘IUA’) (the voice for non-Lloyd’s insurance companies in the London Market) which provide for a scope of cover which limits policy coverage quite significantly.

Similarly, we have had continuing dialogue with the broader market on the nature of the cover they are prepared to offer, to whom and on what terms.  Without exception, the insurers with whom we have engaged are limiting cover further and some are adopting an increasingly ‘standard’ position which is to take some (or all) of the following approaches:

• Restricting coverage to claims arising from negligence only (i.e. the policy excludes contractually assumed liabilities which go further than imposing a duty of ‘due skill and care’).

• Further limiting cover to apply to the actual costs of ‘rectification’ only. This means that cover applies only if and to the extent that the claim is for the cost of the re-performance of the insured’s work, or for rectification costs. Claims for delay are therefore not generally covered.

• Often including a broad exclusion of indirect or consequential losses. This generally means there is no cover for loss of profit, loss of rent, or production value.

• Removing cover for any claims arising from bodily injury.

That is, of course, if they offer any cover for fire safety related claims at all.

The Scheme Specification

It is against this backdrop that we have been negotiating the fire safety cover for our own Scheme.  The positive news is that the ‘default’ position for the majority of our clients is that:

• We have been able to maintain the basis on which cover has always been historically provided (i.e. the broad legal liability basis of cover) and we will continue to provide cover for ‘indirect or consequential losses’ as now.

• There will be no move to restrict the cover to ‘negligence’ and/or rectification’ costs only.

•The policy will still provide an aggregate, costs inclusive limit of indemnity.

This position has, however, come with certain conditions.  Effective from the 1st November 2021, but applying at the date of your next renewal, the limit of indemnity available in respect of a ‘legacy’ Fire Safety Notification (‘FSN’) will change. Please follow this link for a refresher on the policy definition of a FSN.

The intent is that where a FSN is made in respect of a claim or circumstance that might give rise to a claim arising from:

• any building work commenced before 1st November 2019; the Limit of Indemnity available will be no greater than £1,000,000. That limit will apply in respect of all such FSNs in the policy year. As now, that sum will be inclusive of costs and in the aggregate.

• any building work commenced on or after 1st November 2019, the Limit of Indemnity will be no greater than your policy limit (i.e. a costs inclusive aggregate sum at the level of your general limit of indemnity).

These two limits are not separate: the insurers will only pay a maximum of the limit of indemnity for all FSNs in the period of insurance (i.e. you won’t enjoy a £1m limit for ‘legacy’ claims and a separate limit for ‘new’ claims).

There is a recognition from the Scheme insurers that there will be scenarios which might arise which don’t readily lend themselves to an easy characterisation one way or the other.  We will need to work through those scenarios as and when they arise in the years ahead and in doing so there will be a need to use all the pragmatism that we have consistently applied in the past.

In a similar vein, there is no policy definition that sets out what ‘building work commenced’ means, to allow for some pragmatism for those few ‘close’ calls that will inevitably arise. As a guide only, we are suggesting that MHCLG’s guidance on this issue is persuasive, which indicates that the commencement of construction work is usually marked by these features:

• excavation for strip or trench foundations or for pad footings, or the digging out and preparation of ground for raft foundations;

• vibroflotation (stone columns) piling, boring for piles or pile driving;

• drainage work specific to the building(s) concerned.

Whereas the following would generally not be seen as marking the commencement of construction work:

• removal of vegetation, or top soil, or the removal or treatment of contaminated soil

• demolition of any previous buildings on the site;

• excavation of trial holes, dynamic compaction, or general site servicing works (e.g. roadways)

Where clients have more limited cover for FSN matters, or in some circumstances no cover at all, those positions will not alter as a result of the new ‘default’ position.

Impact of the change

As ever, the test for us in assessing any proposed change to our Scheme policy coverage is whether the approach being adopted by insurers is reasonable and proportionate. Our belief is that not only does this change continue to provide cover which is broader than that generally available in the current market, but also that it is of critical importance in our ability to preserve our 80+ year Scheme facilities for the next decade.

The simple reason for that interlinked belief is that the cover we have provided to date for legacy work is so out of step with what the PI insurance market offers today, that all our clients would become collectively exposed to being the last people standing, which is to say, the last people still solvent, trading and with deep insurance pockets for claimants to target. Our Scheme – and more importantly our clients to whom it provides its protection – then potentially become the safety net, not for the errors and omissions of those whom it insures, but for all the ills, problems and failings of how the built environment has been procured, designed and constructed for a generation or more.

The only result of that would be the loss of insurance market support, ending up with an overall specification of cover which is objectively worse than that at which we have arrived. In entirely plausible scenarios, we might end up with no Scheme offering at all.

The story behind why the industry has ended up where we have is a complicated one. It will have been evident to anyone involved in construction that the PI insurance market has been continuing to restrict and remove cover in this area. That further change to the cover was likely was a frequent warning of ours.

That we have been able to maintain very broad cover some 4-years after Grenfell has put all our clients in a very strong position as regards protection against genuine FSN claims. We would hope that, by now, any material FSN problems relating to legacy matters would have been notified to Scheme insurers. If you are in any doubt about whether to notify anything then we would strongly recommend speaking to your usual G&A contact. For initial advice, please refresh yourself on the issues by reading our recently revised guidance here.

The change we have made is one that we genuinely believe, having regard to the alternative options available, is in the long-term best interests of our clients and the supply side of the industry generally.

We could have simply agreed to restrict cover in the way the PI insurance market generally is seeking to do. This would have provided a higher limit of indemnity for FSNs, certainly, but it would have done so at a considerable cost. That cost would have been to remove essential protections in relation to most contractually assumed liabilities. The cost would have included the removal of all other aspects of cover, other than the direct expenses of rectifying the work that had been undertaken. The cost would have been to expose our clients to uninsured exposures for delay and bodily injury claims. The cost would have been to provide to our clients what amounts to an insurance product of questionable value.

The future

Our belief is that this is the last change needed to this aspect of cover. Critically, our insurer partners now share our belief that whatever the faults of the Building Safety Bill, it will bring about an environment which is objectively better than what has gone before. This is one of the cornerstones of our argument to preserve the more normalised cover our clients will enjoy for the work they do designing the buildings of today and tomorrow.

Inevitably, this will again see Scheme clients enjoy much wider cover for fire safety claims than most of their peers. Our belief is that through the changes implemented to date and with the upcoming changes to safety legislation, that this divergence will be a sustainable one.

As ever, we will continue to monitor the situation closely, report frequently on any developments, and work with the construction industry bodies, BIBA and other relevant stakeholders to try to effect the broad environmental changes which, as is becoming increasingly apparent, are required to resolve these issues.

Cyber Liability clarification

A further sign of our changing times is the increasing Cyber threats we are collectively facing. To comply with recent regulatory requirements around whether (and to what extent) insurance policies cover ‘cyber’ liability, our Scheme insurers will be introducing an exclusion for cyber liabilities and removing those modest extensions of cover in respect of the payment of crisis consultants’ fees and claims for breaches of data protection legislation around the use of personal data.

We don’t believe that any of our clients have ever used the extensions to cover introduced and in place since 2014 but given the rising prominence of cyber liability and the potentially business critical importance of dedicated cyber insurance products, we report in more detail on those changes here.

We hope that this overview provides a good understanding of the changes that will be introduced to our Scheme this year and the reasons behind the action being taken by insurers.  As ever, should you have any questions or if you would simply like to chat through any aspect, then do please get in touch with your usual G&A account handler.