The hardening of the professional indemnity market will not have escaped the notice of anyone in the construction industry recently renewing their cover.
Factors including some underwriters ceasing to provide or reducing their capacity, increased claims and perceived increased risks such as Grenfell/cladding related claims have led to the market shrinking and to significant premium increases. The premium increases are likely to be particularly difficult for smaller companies to absorb and against the background of Covid and a patchy recovery may contribute to affected businesses becoming unsustainable. Possibly leading to more consolidation.
We are seeing :
- Much more cover being written on an "aggregate" as opposed to "any one" or " each and every" claim basis.
- Increased deductibles/ excesses - the higher those are, the more those relying on the cover will want to investigate if the insured is good for claims up to and including the deductible/excess amounts
- New restrictions and exclusions on cover, particularly in relation to fire safety and cladding.
So where does that leave those clients/employers and collateral warranty beneficiaries who rely on the insurance cover? Dealing with the above points in turn.
- Aggregate cover is far less attractive to those seeking to rely on it, as there is effectively only one insurance pot for all claims made in any one annual insurance period against the insured not just on the development in question but also any other developments in which the insured is engaged.
- High excesses/deductibles mean that the insured bears a greater proportion of the risk and liability for claims. This may intensify financial scrutiny and questioning about the insured's ability to meet that part of any claim. Will such scrutiny adversely affect smaller companies disproportionately to larger ones?
- Historically those seeking to satisfy themselves that adequate insurance cover is in place, have been satisfied with the production of brokers' certificates and insureds have been very reluctant to disclose the underlying policy or its terms. Brokers certificates alone may no longer be adequate if they only confirm the amount and basis of cover. The scope of pre-contract enquiries is likely now to be more searching to tease out relevant exclusions and restrictions.
The question also arises about the position of a party to a construction agreement/appointment who has agreed to maintain insurance at a level and on terms that are no longer obtainable. Alternatively, are not obtainable on "commercially reasonable rates and terms" (as is often expressly provided for in the relevant contract/appointment). Some contracts go on to provide that the employer/client once notified of a problem obtaining cover in accordance with the contract, may take out its own cover and charge it back to the party who should have maintained the cover. However, it is unclear how that works in practice, given that the risk being insured is still that of the original insured party.
From a legal perspective a failure to renew insurance on terms provided for in a contract will be a breach. But what is the loss suffered and therefore what damages can be claimed?
For developments already practically complete, if a design defect is subsequently found, it is only then that the loss caused by it will become apparent. If a claim is then made and the insurance cover is found lacking (in comparison with the cover that should have been maintained) the insured will, in principle, be liable for any uninsured damages. However that is no consolation to a claimant if the party which should have been insured will not be indemnified by its insurers and is not good for the claim. The very purpose of the obligation to take out and maintain insurance is defeated, because the security that it should have provided is weakened or at worse is illusory.
It is also appropriate to consider the position in relation to sales and lettings of buildings within the usual 12 year limitation period. Purchasers and tenants and those funding them expect to receive a security package of insurance backed warranties from those involved in the design of a building and its services. If the significant designers cannot then obtain insurance on the original contractual terms will this affect the value and saleability of the property interest? If it does might those designers be liable for any such reduced valuation ?
It remains to be seen how the construction and property markets will respond to the issues mentioned above.