Construction contractors face reduced protection over changing professional indemnity policies
The current market conditions
A number of factors have created a challenging PI insurance climate for buyers: Several years of soft market conditions causing underwriting losses have prompted insurers to take action. PI insurers have been paying out more in claims than they have received in premiums for many years and a number of key players had not made an underwriting profit for 10+ years. A market adjustment has therefore been on the cards for some time. The LIoyd's thematic profitability review has further increased pressure on insurers to address the issue.
In addition, a low interest rate environment squeezing investment returns have given insurers even more reason to adjust pricing and underwriting conditions.
Since 2017, contracting firms have faced premium rate increases of 20-30% year-on-year. In many cases, rate increases have been more severe and there have been several instances of non-renewal for those worse performing risks or where an insurer no longer writes this class of business.
The impact of the Grenfell Tower disaster
The tragic Grenfell Tower Fire in 2017 which resulted in the death of 72 people has certainly contributed to the hardening PI insurance market for contractors. The uncertainty surrounding cladding products following the disaster prompted insurers to increase premiums to reflect the perceived higher risk exposure and to become more cautious in their underwriting approach.
The tragedy has raised broad concern among insurers about the potential of systemic/catastrophic consequential losses. Insurers believe that they face increased liability due to broad insurance policy terms (civil liability). Consequently, some insurers withdrew from the construction PI market reducing the available capacity at renewals.
Impact on contractors
In addition to premium increases driven by the hard market, insurers are also often applying a number of other punitive amendments aimed at contracting firms, including:
- Cover may change from an “any one claim” basis to aggregate.
- Change to the policy excess being applicable to costs and increased on a ‘per claim’ basis
- Reduction of indemnity limits as insurers are lowering their capacity. If cover is not amended from “any one claim” to aggregate, it may be advisable to request that the aggregate limit comes with unlimited round-the-clock reinstatements. This can act as an alternative to “any one claim” cover.
Further, nearly all insurers have introduced exclusionary language, or restricted cover, in the UK (and in certain other global territories whereby similar issues have occurred) for both cladding and fire safety claims at renewal. This is especially prevalent to contractors who are perceived to be at the front line of such issues within the construction industry.
The nature of the cladding/fire safety claims environment also has a further knock-on effect within the industry:
- Insurers of design and build (D&B) contractors incur legal costs without knowing if they can pass down claims to their supply chain, potentially creating insolvency risks.
- Premium rates for main contractors increase because of inability to subrogate down supply chain.
- Inability of firms to honour previously agreed contractual liability caps / basis of cover
- Rectifying the cladding could potentially cause another breach of contract.
- Inability to agree a reasonable form of contract between contractor remediating the cladding and the building owner.
Fire Safety & Cladding – making insurers understand
Insureds can improve their negotiating position with insurers by following some best practice rules that can make insurers feel more comfortable in underwriting the potential fire safety and cladding risk. Ideally, this would be displayed to insurers and at the forefront of any renewal submission.
- Contractors mandating design guides and standards during installation on site (fire stopping etc.)
- Peer sharing of knowledge and best practice
- Contractors partnering with 2-3 specialist fire stopping companies rather than this being tendered as part of a multiple package even if this leads to higher sub-contract price
- Codes of practice (ASFP*) / Third party accreditation by FIRAS*
- Digital records – audit of work through software platforms, real time photos, GPS located.
- Regular on-site audits (design v on-site construction checked, verified, new mark-up drawings)
- Allows future defence of claims (even for fire stopping / compartmentalisation behind cladding system.
Due to the hard market conditions and limited underwriting appetites, underwriters are busier than ever as they have more renewal submissions than ever with more information attaching with each submission. Receiving renewal information back in a timely fashion is therefore vital for all renewals. Ideally, insurers would be engaged at least 6 weeks prior to a renewal date. Regular calls between the insured and broker focusing upon market updates are vital, and arranging tripartite calls with the insured/broker/underwriter also add value to the underwriter's understanding of the risk.
Unfortunately, increasing premiums, excess and reducing limits are mostly unavoidable for contracting firms in the UK. The hardening market means that insurers hold all of the cards. This is all about damage limitation, adequate coverage and avoiding being uninsured. Working closely with your broker is more important than ever.
- Get the renewal info in early (ideally 6 weeks before renewal).
- Meet with your insurer if you can. If they hold your other liability insurances, this can mean a more beneficial outcome.
- How are you limiting liabilities in contract? Are you excluding any consequential losses? What about financial caps?
- Does your supply chain all buy PII? To what limit?
- What risk management procedures does the firm operate?
- If you have had claims, why won’t that scenario happen again? What steps have been taken?
- The soft market was a time for alternatives. The hard market is a time to build & utilise the relationship you have with your current insurer as that is always going to be the best option.
A greater level of due diligence than ever is required to successfully renew PI policies for contractors. In order to instil confidence in their risk exposure, buyers should explain their business carefully to insurers. While negotiations are tougher than in the past, coverage can still be achieved on reasonable terms and conditions if the right information is made available to insurers.
It is vital to provide a detailed submission to get the underwriter to dedicate their time to assess the risk. Providing a two-page renewal submission is no longer sufficient to obtain a contract certain quote. Instead, the following items should serve as a starting point:
- A proposal form with all questions completed and any additional information to support the answers also provided in an additional appendix.
- Supplementary construction questionnaire to provide information relating to cladding/fire safety, basement and swimming pool work.
- Survey and valuation questionnaire if applicable.
- Covid-19 questionnaire - a lot of insurers are now asking for information on how the insured has managed their business through the lockdown and what procedures have been put in place.
- Any additional risk management information on how the insured manages their risk, staff training, CPD, business continuity plans, etc. Considerations to the price and cover going forward
As PI claims cost continue to rise for insurers, many underwriters are still struggling to make a profit, suggesting that the market will continue hardening for some time despite past premium increases. There are currently no positive signs that the market may be stabilising. It is therefore vital that contractors build a clear picture of their risks, address them effectively and spend the appropriate time on their PI submission and continually communicate with their broker and insurer throughout the process.
For further information, please contact:
David Isherwood, Global Professional and Financial Risks
T: +44 (0)20 7933 2195
David Hayhow – Partner Global Construction Practice
T: +44 (0)20 7933 2624
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