The UK’s Professional Indemnity Insurance (“PII”) market is hardening, making it increasingly difficult for contractors and consultants alike to obtain such cover on commercially viable rates and terms.
The Construction Leadership Council has found that nearly 30% of construction businesses in the past 24 months have been unable to purchase the required level of PII cover, while 44% have had three or more insurers decline to provide a quote for PII over their past two policy renewals.
Even when the required level of cover can be obtained, it is becoming ever more common to see insurers imposing strict limitations or exclusions of liability, as well as substantial excess amounts. Following the Grenfell tragedy, carve-outs relating to fire safety and cladding are particularly prevalent. It is thought that around 68% of PII policies now have restrictions on cover for fire safety, while just less than half of policies exclude cover for cladding claims altogether.
Such market volatility holds numerous consequences for contractors, consultants and developers, as well as third party stakeholders such as funders and future purchasers and tenants:
- In terms of general market impact, excessive premium rates may not be economically viable for some businesses. Affordability aside, they may not even be able to obtain a quote for the level of insurance that is required by a particular contract. This is likely to impact the supply chain, with certain firms possibly having to turn down projects (and work pipelines diminishing as a result).
- From a contract negotiation point of view, providers will be keener then ever to ensure that their contractual PII obligations are subject to an express caveat that such cover need only be maintained to the extent that it is available “at commercially reasonable rates and terms”. It seems likely that extensive liability caps and exclusions will also become more common, as providers seek to ensure that their contractual liability does not extend beyond their PII. Indeed, the latest edition of the RIBA standard form contract for architects includes a new liability sub-cap covering cladding and fire-related matters.
- Even after a project has completed, difficulties in obtaining PII cover may have a detrimental impact if a latent design issue arises. PII is typically taken out on a ‘claims made’ basis, meaning that cover must be in place at the time a claim is brought. In other words, it is not enough for PII to be maintained for the project programme; it must be in place for the entire duration of the insured’s contractual liability.
It remains to be seen how long the current difficulties in the PII market will continue for. In the meantime, all stakeholders should be mindful of the issues presented so that, together, they can best manage the risks involved.
For more information on this article please contact Laura Reeves.