The Grenfell effect on the PI insurance market

The Grenfell disaster occurred on the night of 14 June 2017, but its effects are still being felt across the construction sector and beyond.

As a result of the disaster, which claimed over 70 lives, many believe that the public has lost some of the confidence it had in the construction sector. The sector may also have lost some of its confidence in the accuracy of test results given by certain manufacturers for their building materials! Building Standards have been looked at, of course, and amended for new work to be carried out. Work carried out in the past – sometimes a considerable time in the past – is also being looked at to determine whether it meets modern standards. In that process, some people fail to recognise and acknowledge that, over the decades, standards have changed and improved. Those who designed and constructed buildings in the second half of the 20th century should not be judged against different and more recent, improved, standards only introduced in the 21st century.

So, against that background, one of the most important areas of concern currently is the effect of all of this on the PI insurance market. At first blush, this might be thought of as a problem that will affect only the construction professionals, principally architects and engineers, but that would be a rather short-sighted analysis of the problem because it will have an effect on employers, contractors and suppliers as well as the developers, owners and tenants of buildings.

Professional Indemnity insurance

The adverse effect of the Grenfell disaster on the PI insurance market has been profound. The full extent of it is only now being felt.

Consultant Designers, design/build contractors, specialist sub-contractors and suppliers will be finding that when they renew their PI policies this year, it’s very likely that the wording will have changed. It will contain, in many cases, very wide exclusions of liability and indemnity that were not there before – for example, exclusions not just in relation to inflammable cladding but, in some cases, virtually anything to do with the design and construction of the external elevations of buildings. This ridiculous position will be most acutely felt where remediation works are to be designed and carried out to remove cladding on buildings which is considered to be defective in light of the lessons learned from the Grenfell disaster. Consultants and design/build contractors are finding that the insurance market doesn’t want to take much risk when insuring those in the construction sector who design and construct external cladding on buildings and indeed, in some cases, anything that might comprise the whole external elevations of buildings. The wording of these new policy exclusions needs to be considered very carefully. While they may contain some words which might, at first blush, indicate that they are there to protect insurers from the specification and use of flammable cladding, the wording of the exclusions sometimes goes far beyond that, no doubt in a surfeit of caution to make sure that the ‘cladding problem’ has been  addressed.

Normally, employers will require designers and contractors to have PI insurance in place for the risks that might arise on a project. Those carrying out relevant design or construction work need to make sure that they have appropriate PI cover for the task they are undertaking, particularly if that task involves the design or construction of external facades of buildings. The existence of such insurance may not just be a contractual requirement on the provider of the work, but it may also be a requirement of the provider’s professional body or industry association. As this type of work is very common, not some specialty of unusual nature, the exclusions being seen may be capable of depriving the work provider of cover in circumstances where cover is, erroneously, thought to be in place.

All of this means that there is a risk that designers and constructors may unwittingly take on work for which, in truth, they don’t have  appropriate PI insurance cover. The end result is that, in some cases, it will be very difficult for designers and constructors to undertake what many regard as essential work thus seriously affecting who can carry out such work and how much it will cost, including the increased cost of insurance for whatever cover may be available in the insurance market, if any. At worst, it means designers and constructors may have no cover should something go wrong, which just gives rise to a whole host of additional problems which is likely to cause much additional harm to the reputation of those carrying out such essential work in the construction sector.

Many in the industry consider that if they are to try to face up to the different requirements of 21st century construction, the insurance market needs to follow and support those who need to take out relevant PI insurance. If it means a reasonable increase in premiums to meet a different type of risk, that cost will no doubt be passed on directly or indirectly to those in the sector and then passed on to those who ultimately have to pay for the design and construction of buildings. There is a growing feeling that some in the PI insurance market may have gone too far with their exclusions and restrictions on cover and that the effects of that are only now beginning to be felt including the inability to carry out what might be regarded as essential work because PI insurers won’t cover it.

Construction at MacRoberts

Our experience and expertise in construction extends back many decades and MacRoberts’ lawyers are widely respected both in legal circles and within the construction industry.