Fire safety, cladding and the PI Insurance crisis – the perfect storm?


We are in an environment where the Government are making millions of pounds available for crucial remediation and compliance work, and there is a need to build more and higher quality housing, which will ultimately be governed by the need for new skills and accreditation. Alongside this, the incremental reductions in PI cover available and the increases in premiums and excesses applied, run the very high risk of restricted capacity in the market, greater risk aversion, or indeed burying one’s head in the sand and less appetite to deliver the work, all potentially leading to the perfect storm. 

Managing Partner, Andy Tookey, hosted a round table session at the 2020 HOMES UK virtual event, to discuss the challenges, potential solutions and their implications for the construction market. Below he summarises the key points from the discussion with our panel of speakers from across the industry representing views from the insurance sector, consultants, lawyers, contractors and clients.

The demand to complete the essential work of remediation to existing buildings and development of new homes is undisputed. Every contractor and consultant I have spoken to has felt the impact of the PI insurance market conditions – with an initial focus on cladding, the attention over the past couple of years has broadened out to fire safety more generally. What this has meant in real terms is the availability of PI cover for fire safety being significantly impaired, with restrictions and exclusions being drafted to take out as much cover as possible. Those that don’t try to exclude cover completely are narrowing cover by restricting it to “direct” and not “consequential” loss, applying inner sub-limits, providing cover on an aggregate basis only and applying some eyewatering excesses, sometimes on an each and every building basis.

Lack of Capacity

I should point out that the Grenfell Tragedy is not the sole reason for the insurance industry’s reaction – we also need to consider that the UK PI market has been running at a loss for a number of years, perhaps due to poor underwriting disciplines and poor claim performance, which came to a head in 2008 with a review by Lloyds of London. This resulted in approximately 25% of the insurance capacity, or $130m capacity, exiting the UK market.

Matt Farman, Director in the Financial Lines division at Howden Insurance Brokers, explained at the round table event that “there is a real lack of capacity in the market (the amount of premium insurers can write in a 12 month period), so firms renewing from mid-October until the end of the year may find they have more of a problem renewing their cover as some insurers will have run out of capacity. It’s not looking much better for 2021: It has been suggested that Lloyd’s have capped growth at around 8.5%, so Lloyd’s syndicates will be writing less new business and scrutinising the type of business they want to renew. This means it is really important how firms present themselves and their risk profile, and it’s recommended to meet with your insurers early to discuss.

Embedding change

Professor Rudi Klein, Chief Executive at SEC Group, outlined four key points that need to be addressed as a pre-requisite to embedding long-term change allowing for industry risks to become insurable at reasonable premiums:

  1. Risk – there is a need for all key members of the delivery team to identify risks and decide ownership. Currently, all parties agree to risks that are not insurable, for example indemnity clauses. We need to look at risks right at the beginning and advances in technology such as AI could help with this.
  2. Procurement – we need a radical overhaul of procurement. We still procure the way we have been doing for 150 years and it stops us from managing risk effectively. Everyone is operating in their own contractual boxes and focused on contractual rather than project risk. There is a lack of collaborative delivery and procurement processes that would allow us to manage risk effectively.
  3. Competence – We need to consider corporate competence, not just individual. We don’t currently have a reliable benchmark on which businesses are competent and the UK needs a statutory licensing scheme (as in most US states) that provides evidence of a firm’s technical capability.
  4. Payment – We need to make progress here to avoid payment abuse in the industry. Dame Judith Hackitt has observed that poor payment practices drive poor behaviours which, in turn, drive poor quality. A possible solution is statutory project bank accounts to enhance payment security for the supply chain.
Contractual clarity

Katie Saunders, construction lawyer and Partner at Trowers and Hamlins LLP, highlighted the importance of differentiating between new build and refurbishment projects: “Design and Build is the most common form of contract for new build housing across the UK, but is it a suitable structure? There is now a much higher responsibility for the client on design and building safety which will be underlined by the Building Safety Bill. We are also seeing push back from contractors who are struggling to get the required PI. They are looking for caps on liability and want to avoid agreeing insurance obligations on an ‘each and every claim’ basis. Clients need to maintain the golden thread, avoid making appointments based on the lowest price and consider competence, as the Building Safety Bill outlines. Maybe moving towards a more traditional JCT contract or more collaborative working using alliancing contracts, early engagement of contractors and using BIM will all help with this.”

“Refurbishment works involve existing properties where it’s traditionally the client who is insured. The question is who takes responsibility for the structure? Taking responsibility for the retrofitting and cladding is being extended to full responsibility of the fire safety of the building.” This is a point that Daren Moseley (United Living) picked up on later, questioning the reasonableness and appropriate use of such clauses from a contractor’s point of view. Katie went on to emphasise that she’s never seen so many requests for caps on liability and again that collaboration and a consideration of quality vs. price are important.

When asked if she thinks clients are aware of the issue in the market, Katie replied that they are “much more aware that the cover isn’t the same. Clarity around roles and responsibilities is what is going to get us through this along with collaboration on where the risk is on a project-by-project basis. It’s important not to fudge it, which arguably design and build is doing.”

Challenges for clients and contractors

Providing a client’s viewpoint, Niall O’Rourke Metropolitan Thames Valley Housing’s Director of Safer Buildings echoed the need for change and the growing realisation of challenges everyone is facing at a national and international level. “We need to act now. The COVID-19 pandemic has demonstrated that we can change and adapt quickly.  All stakeholders need to consider the bigger picture and the PI dilemma needs to be resolved. The cost of slowing the remediation and development of better quality homes does not make sense. It is in every stakeholder’s and the nation’s interest that buildings are remediated to provide safer homes. We know everyone needs to sign up to a new way of working but we shouldn’t be signing up to things without correct measures in place.”

Daren Moseley, COO of United Living also highlighted that there is a difficulty with the changing PI climate stating that, as contractors, they are having trouble “getting across the line” as they can’t agree cover and “as premiums are up, contractors have to consider this cost in their bid submissions”. Daren also highlighted that early engagement is key to improving the situation and that it’s clear that we need to think differently and change the culture. Daren also noted: “We are seeing a continued approach to heavily amending standard forms of contract and extraneous requirements within Employers Requirements to accept substantial risks that not only conflict with our insurance, due to exclusions or the like, but also seek to pass unreasonable liability that cannot be accepted.”

Possible Solutions?

In summing up the discussion, I raised the possibility of project-specific insurance or integrated project insurance (IPI), to which Matt Farman agreed that it could be a potential solution, but insurers might only offer this on very large projects. One other option raised was the ‘Pool Re’ type approach, which was adopted in the 1990s when property insurers were reluctant to provide terrorism cover to commercial buildings. Matt explained that this is an insurance mutual, with a pool of insurers as members whereby they pay a premium to Pool Re to enable them to offer terrorism cover under a commercial property insurance. In the event of a claim, Pool Re reimburse the insurer for any losses from the fund that has built up over many years. This fund has unlimited backing from UK Government in the event that the pool of premium is exhausted, but this has never happened in over 25 years. All agreed this approach had potential and should be followed up.

Rudi Klein also reiterated at this point that “it’s not just a cultural change that’s needed, but it’s about a dysfunctionality in the way we procure and deliver projects”. So, if that is the case, and the panellists are all in agreement that early engagement and collaboration is key, why do we so often find that the procurement “tail is wagging the dog”? Niall’s view is that “there is a resource issue, and that people are following the behaviours that have been set. Someone has to go first and perhaps there is an obligation on the larger registered providers to lead by example.”

It’s evident that the key themes of this discussion are capacity, collaboration and competence and that there is a need to address this at the highest level. When asked if the increasing limits on cover risks stagnating the market, all panellists agreed, so it is clear something needs to be done sooner rather than later. Making these desperately needed changes, however, requires engagement, creative thinking and a positive response from government, insurers, clients and the construction industry as a whole.