CoP - Challenges of professional indemnity insurance summary

Construction Leadership Council update on PII

Samantha Peat, Chair of the PII Group, Construction Leadership Council (CLC) and Chief Executive of The Wren Insurance Association provided the views of the CLC group. She said the biggest concern was the scope, limitations and pricing of cover in areas of fire safety and cladding. It became apparent after the Grenfell tragedy that insurers were putting in restrictions and exclusions which were widened beyond these areas and therefore prevented clients from carrying out required work. The group decided not to dwell on the problems but seek solutions and develop an action plan.

As part of this plan the group approached MHCLG to ask the Government to underwrite or guarantee fire safety risk and decided to pull together evidence from the sector to underpin this request. Samantha Peat shared the early findings of their survey which has become the biggest of its type with 1066 responses from the construction sector. They were mainly SMEs who had seen premiums rise whilst unable to get sufficient PII cover even though very little construction involved high rise buildings. Many businesses had to accept restrictions or couldn’t take part in remedial work and jobs have been lost. The group is still digesting the detailed responses but expect the survey to be published soon.

Introduction to PII from a client perspective

Neil Timberlake, Group Insurance Director, Landsec provided an introduction to PII. He mentioned the harsh realities facing the market including higher prices for less cover. This was impacting on construction projects across the board, with even fire consultants having to accept an exclusion on fire safety. As a developer Neil Timberlake said he faced the stark choice of  taking the risk as a client or pushing the risk all the way down the supply chain which could lead potentially to a smaller company going out of business. He also mentioned that consultants who completed a project 5 years ago could no longer comply with PII requirements in pre-agreed warranties.

Neil Timberlake asked himself the question, in good faith, why insurers thought it was alright to run for the hills when risks manifested themselves. It left developers “Carrying the Can”. He also questioned whether it was acceptable for PII to be charged to everyone who is contributing to the whole life of the project. The “One Size Fits All” approach no longer appeared appropriate when a small percentage of work was related to fire safety, yet everyone was hit by the same premium increases.

Under the banner of “Seeking Perfection in an Imperfect World” Neil Timberlake addressed potential solutions including  Government Intervention (e.g. revising EWS1 forms), improving the way Building Safety Bill Liabilities could be covered, insurers drawing a line under previous risk exposure and accepting, higher premiums but reinstating the excluded coverage. Neil Timberlake also mentioned his company’s practical changes to contractual conditions, accepting suppliers would proceed in the short-term without adequate cover but perhaps this could be added at a later stage. Perhaps the provision of single project insurance should be looked at as an alternative for PII.

Underwriter perspective

Michael Attwell, Chairperson, Construction Working Group within the Professional Indemnity Forum, International Underwriting Association of London talked about the challenges of delivering PII policies and why we had arrived at this place. Michael Attwell said that PII is more capital intensive than motor insurance as the  market is more volatile and has a long tail of claims. The PII market had been hit so badly because of large losses already incurred by late/overbudget projects in the renewables sector and the underlying weaknesses in the sector exposing systemic risk. The insurance industry was still dealing with thousands of individual claims post Grenfell. There was also the lowest cost culture and propensity to suffer disputes.

In terms of the way forward Michael Attwell suggested there was more constructive industry engagement and an opportunity for better regulation within the construction sector. He also welcomed more engagement across the project lifecycle and a positive change within the industry with the advent of offsite manufacture. Michael Attwell also said the insurance industry was contributing to the development of a common language to be used on policy forms and discussing where incremental change should be focused.

Broker perspective

Stephen Davey, Partner, UK Professions, Lockton talked about the impact of PII on construction firms and practical solutions to challenges. He provided an overview of the market showing that PII insurers have paid out more in claims than they have received in premiums for many years. As a result many PII insurers have not made an underwriting profit for 10+ years.

Since 2017 there had been 20-30% year-on-year premium rate increases. Due to continued severity PII claims, despite premium increases many insurers writing construction PII are still not forecast actuarially to make a profit. For many firms, current PII premiums are still 30-40% less than they paid in 2002/03 and they are many times larger in terms of revenue. Stephen Davey also mentioned that the top of the supply chain is taking most of the risk  whilst the construction business model was set up to dissipate risks throughout the supply chain.

How could the sector move forward? Stephen Davey said that best practice was needed to give PI Insurers confidence over future risk. Contractors mandating design guides and standards during installation on site (fire stopping etc) and peer sharing of knowledge and best practice could help. He also mentioned contractors partnering with 2-3 specialist fire stopping companies rather than this being tendered as part of a multiple package even if this leads to higher sub-contract price. Stephen Davey said that the defence of non-compliant work was difficult without an accurate audit of work delivered 10-15 years ago and retrofitted since. Digital records and regular on-site audits (design v on-site construction checked, verified, new mark-up drawings) could be helpful.

Another crucial change in approach could be separating PII cover for historic issues not yet notified from projects designed under new regulatory regime. Stephen Davey welcomed the proactive setting up of the £5 billion Building Safety Fund by Government but there could be issues around who would undertake the cover. Stephen Davey also suggested looking at the approach in other countries such as Australia. He cited the example of the state of Victoria. They had launched a new insurance scheme whereby the state paid the premium for remediation projects without fire safety exclusions.

Q&A session

The host introduced a panel of experts including the speakers and:
Veronica Flint Williams, Contract and Risk Manager, Environment Agency
Keith Bishop, Group Insurance Manager, Laing O’Rourke
Fraser Davidson, Executive Director Design & Build, Europe, Jacobs
Dr David Hancock, Construction Director, Infrastructure and Projects Authority,
Andrew Bickell, Senior Vice President, Global Professional & Financial Risks

The panel picked up a number of questions around the lack of professionalism in ACM buildings, SMEs sharing their robust internal systems with insurers and making sure you know why insurance cover has been bought. Several attendees asked about PII issues in non-cladding related sectors such as geotechnics and water utilities. The point was made that their premiums have risen too. It was suggested that premiums could be reduced by capitalising on the competitive insurance market and presenting the risks well to this audience.

Dirk Vennix concluded the webinar by thanking the speakers and panelists for their insights and recommendations for providing practical solutions to the challenges facing PII. He expect that the next CoP webinar will cover the risks around contracts works and will be held in June.