Experts from law firm Trowers & Hamlins and insurance company Marsh discuss the effects that the building safety regime is having on construction and property insurance.
As is well known in the industry, premiums for professional indemnity insurance (PII) increased significantly in the wake of the Grenfell Tower fire.
The building safety issues discovered since the tragedy, along with the new statutory routes implemented to assist with recovering remediation costs and the retrospective extension to the period for bringing claims under the Defective Premises Act 1972, has led to substantial increases in claims.
This, in turn, hardened the PII market and created challenges such as limited capacity, high premiums and restricted coverage between 2017 and 2021.
However, the PII market for main contractors, developers and the middle market now seems to have settled, with a considerable amount of capacity now available and improvements to premiums and cover.
Overall, the limits to cover are at more viable levels, although, given the cost of premiums, higher limits may remain out of reach for some. However, the exclusions and/or restrictions for cladding and/or fire safety related claims still remain. There is also the difficulty that certain professions, such as managing agents, have in obtaining cover.
Building safety claims
With the new dutyholder and competency regime coming into force for most projects, along with the Gateways regime for higher-risk buildings, there should be an improved focus on competency and compliance with the building regulations and consequently, a reduction in building safety issues and claims.
At Marsh we predict that in the long term these measures will be viewed positively and improve insurers’ appetite to take on more construction-related risks.
Marsh believes the volume of construction claims under PII is the largest it has seen. In terms of building safety claims by developers, the majority have not been resolved, so they have yet to impact renewals. For contractors, claims are impacting renewals but are not significantly affecting premiums.
The new suite of remedies introduced by the Building Safety Act 2022 – some of which are non-fault based and which can pierce the corporate veil – could also cause difficulties for developers and contractors, as well as any associated companies that are seeking to claim under their PII.
This is because the party that may ultimately bear some, or all, of the remediation costs might not necessarily face any allegations of negligence. How such claims will be resolved remains to be seen.
Residential buildings insurance
The market for buildings insurance in the residential sector has been similar to the PII market: premiums rose significantly over a similar period, but are also starting to settle.
There is, however, an important distinction between the market in the private housing and social housing sectors, with the hardening of the market being more pronounced in the latter, which has less capacity.
Equally, it has been seen that portfolios of properties are easier to insure, as there is a greater spread of risk. So while buildings insurance in the residential sector remains difficult as a whole and one big weather event could change the position entirely, there is more appetite and capacity in the market.
There has been a perfect storm of factors that have resulted in the hardening of the market for insurance of residential buildings, namely:
- The soft market that existed for over 20 years, where premiums across the market were driven down over a prolonged period of time, creating unsustainable loss ratios.
- Escape of water claims: these account for around 70% of total claims in the residential sector, but cladding and fire safety issues post-Grenfell remain a concern.
- The rise of extreme weather events, which are also getting more severe.
- Rising reinsurance costs.
- Rising rebuild costs due to double-digit inflation for labour and materials.
Modern methods of construction
For higher-risk buildings, there remain issues with a lack of historic data on what is referred to as COPE information (Construction, Occupation, Protection and Exposure), not just in respect of cladding and fire safety issues.
This is partly a result of the previous soft market and such information not being required for renewals. Marsh’s advice is to offer as much construction data as you can when renewing policies.
The use of modern methods of construction (MMC) can also lead to higher premiums for a development due to the lack of historic claims data to enable the risk to be properly analysed.
Marsh’s advice for new developments is to engage brokers and insurers at the design stage to discuss fire protection and construction methods, particularly on developments using MMC.
Helen Stuart is a partner in construction disputes at Trowers & Hamlins. Her clients Paul Chetwynd-Talbot and James Bainbridge are the chairman for real estate and head of construction professional indemnity insurance, respectively, at Marsh.
