How fire safety is changing the face of insurance
The Grenfell Tower fire sent shockwaves through British society. With more than 300 high-rise buildings identified for re-cladding, the implications for fire safety in other high-rise buildings have sent tremors through the UK construction sector and the insurance market that underwrites its professional indemnity insurance.
The remediation process will take time, and there are concerns that what we have seen so far is just the tip of the iceberg. A government report issued in March 2018 noted that just seven out of 160 social housing towers identified as dangerous had been re-clad with safer materials. Another 100 towers with council tenant residents awaited improvement. As remediation work goes ahead on ACM-clad buildings, it is likely to uncover a whole range of costly associated issues – for example, around insulation, fire compartmentalisation and cavity barriers.
Insured parties are under significant pressure to remediate dangerous buildings quickly, particularly where lives could be put at risk. Before the remediation work is complete, there is additional financial pressure to cover waking watches, relocation costs, and other consequential losses. Remediation work is often undertaken before the contractor is held liable, and therefore before it is known whether a firm’s PII will respond. It is also uncertain whether re-cladding work that is code-compliant now will still be compliant in 12 months’ time.
Fire safety has had a profound effect on the pricing, terms, and availability of PII for firms operating in the construction sector. Insurers are likely to find themselves in the uncomfortable position of seeing contractors’ losses crystallise without knowing whether they can be recovered from other entities further down the supply chain. In turn, these entities might have become insolvent or had fire-safety-related exclusions added to their PII, which would limit the insurance cover available to pay a subrogated loss.
Even before the Grenfell tragedy, insurers faced a challenging PI marketplace. A report from Lloyd’s of London in 2018 revealed that 62% of syndicates have recorded an aggregate loss on their non-US PI portfolio over the past six years, making this their second-worst performing class of business. The Lloyd’s market paid out £272m in non-US architects and engineers PI claims in 2017, while taking in just £170m in premiums: clearly, this is not a sustainable business model.
Lloyd’s responded by requiring loss-making syndicates to put forward business plans for 2019 that would return them to sustainable profitability. For many syndicates this has meant writing 10-20% rate increases into their business plans to get them signed off by Lloyd’s. If syndicates do not stick to their plans, Lloyd’s can and will prevent them from underwriting loss-making lines of business.
Some insurers have already pulled out of the PI market altogether, and most of those that are still active are reducing capacity for construction risks, particularly for contractors, creating significant capacity shortfalls. Unsurprisingly insurers are putting up premiums, thinning out their portfolios, and taking a tougher line on terms and conditions.
Contractors are seeing significant increases to both premiums and self-insured excesses. We are aware of at least one insurer whose minimum self-insured excess for a contractor is £250,000 for each and every claim.
Insurers are also moving away from “any one claim” limits of indemnity to aggregate limits, greatly reducing the extent of protection for insureds, and potentially putting them in breach of contractual obligations. It is possible reinstatements to the limit of indemnity will be available, however insurers are insisting on higher and higher minimum total limits of indemnity being purchased in order to offer this, which could come at significant additional cost to the insured.
For the last 12-18 months all construction professionals have been required to complete exhaustive “cladding questionnaires.” However, even firms that demonstrate they have undertaken comprehensive reviews of historic projects have broad and onerous fire safety restrictions or exclusions applied at renewal. Those that cannot provide adequate information will either find themselves uninsurable, or face having absolute fire-safety-related exclusions applied.
Due to the “claims-made” nature of PII policies, it is imperative that your firm undertakes a review of historical projects to understand whether you need to notify any claims and/or circumstances which may give rise to a claim, under your current policy. This is particularly important bearing in mind your insurer is highly likely to restrict or exclude cover in respect of fire safety issues from renewal.
From a buyer’s perspective, this is clearly a challenging market. However, if your firm plans well in advance, taking the time and trouble to provide insurers with a detailed and reassuring insight into their working practices and risk management approach, you should still have some options available at renewal.
The key take-home here is that renewals are taking considerably longer than before, so it is advisable to begin the process as early as possible. Securing appropriate cover at an appropriate cost hinges on carrying out a thorough review of past projects, and meeting early with potential insurers to understand their concerns and information needs.
Please contact your Lockton advisor as soon as possible should you have any queries regarding the above; they can discuss the changing PI market with you in detail, provide pragmatic advice regarding any claims and/or circumstance notifications, and help you secure the best possible outcome at your next renewal.
By Andrew Bickell, Senior Vice President, Global Professional & Financial Risks