Most professional consultants do not have sufficient financial capacity to pay for claims brought against them in respect of professional negligence. Subject to the terms of the particular policy, professional indemnity insurance ('PII') provides insurance cover to a consultant where they breach a professional duty that gives rise to financial loss or damage to a third party. Further an obviously related reason, PII is also of vital importance to developers in that it provides a route to financial recourse with regard to any potential design liability of its professional team.
The Grenfell tragedy and Carillion's collapse has contributed to a recent hardening of the construction PI market. These incidents, combined with the ever growing threat of climate change catastrophes, have resulted in insurers considering ways of limiting their exposure.
Exclusions in PI policies
In late 2018 the UK Government announced a ban on the use of combustible cladding on high-rise residential buildings above 18 metres. As a result, PII insurers are frequently choosing to reduce or even exclude cladding cover and fire related safety issues. The following are some of the preferred ways in which insurers curtail PII and reduce their risk:
- Increasing the excess for cladding loss / fire related safety issues.
- Imposing an aggregate cap for cladding loss / fire related safety issues.
- Excluding consequential and/or indirect losses arising from cladding loss fire related safety issues.
- Limit cladding cover so far as building regulations or fire safety regulations are met.
- Requesting additional information regarding the insured's supply chain / risk profile.
- Charging increased premiums to ensure that adequate cover can be provided.
Move towards an aggregate cap
As a way of mitigating their risk, it is becoming more common for PII insurers to offer policies on an aggregate basis, as opposed to the more traditional 'any one claim' basis. This often includes a mix of aggregate sub-limits, particularly with respect to claims relating to pollution and asbestos. The move towards an aggregate cap and generally more restrictively structured policies has presented obvious complications for parties involved in construction projects.
As well as making it difficult for consultants (and design and build contractors in this context) to obtain adequate cover, the tightening of the market presents developers with the challenge of persuading third party stakeholders to accept the agreed levels of PII.
How developers can protect their position
Due to the common law position of joint and several liability, developers have the possibility of pursuing more than one party who may have contributed to the loss and/or damage suffered; meaning that limited PII policies may have less of an impact to the overall amount that developers can recover. However, the administration and cost of making a number of claims against a variety of different parties can create obvious additional problems for developers, in addition to developers bearing the insolvency risk of those parties it is seeking to recover from.
So although a technical option exists for protecting its position in these circumstances, to a certain extent, there is little a developer can do to reduce the risks posed by the current PI market. Nevertheless, there are some practical steps that a developer faced with these difficulties can take in order to protect their position:
- Encourage early engagement so the consultant can secure the required cover at the most reasonable price.
- Confirm the PII being offered to the consultant is both market standard and the maximum possible.
- Ensure consultants are only undertaking duties that are within their capabilities.
- Ensure any sub-contractors being engaged maintain sufficient PII, specifically in relation to cladding.
- Due to the "claims-made" nature of policies, developers should encourage consultants to regularly assess projects they are involved in. If the terms of the policy are set to be varied on renewal, developers should request that consultants review any circumstances which may give rise to a claim under the current policy.
The trends in PII insurance have had and will continue to have a disruptive effect on the UK construction industry and with no end to the increasing restrictions being imposed by PII insurers it remains to be seen what the medium term impact will be on traditional risk apportionment in the market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.