Professional Indemnity Insurance
Members last audited in 2022 will be contacted shortly by a PCA auditor using a restructured process proving that business and technical competency is being achieved in their respective sectors. One specific area under consideration within an audit is that of insurance, with an emphasis to make sure that all our members are adequately covered.
The construction industry requires a variety of insurance types to protect businesses, employees, clients, and third parties from the risks associated with construction activities. These insurances can be categorised into three areas each serving different purposes and offering various levels of coverage.
1. Mandatory: These are insurance policies that are legally required by all members to operate. Failure to have these insurances can result in legal penalties, fines, or the suspension of business operations. These include:
- Employers’ Liability Insurance
- Public Liability Insurance.
2. Protective Insurances: These insurances provide additional protection beyond what is legally required, offering more comprehensive coverage for potential risks faced by the members activities and may include:
- Professional Indemnity Insurance
- Contractors' All Risks (CAR) Insurance
- Product Liability Insurance
- Environmental Liability Insurance.
3. Beneficial Insurances: These insurances, while not mandatory or directly protective against legal risks, provide significant benefits by safeguarding a business's financial health and ensuring continuity in the face of unforeseen circumstances.
- Business Interruption Insurance
- Directors and Officers (D&O) Liability Insurance
- Equipment and Plant Insurance
- Cyber Insurance
- Health Insurance benefits.
Above the mandatory insurance requirements each member has to evaluate their insurance requirements according to perceived risk against their respective business.
One area of insurance cover which is raising many concerns for members who provide design advice and recommendations to third parties is that of obtaining Professional Indemnity Insurance.
Professional Indemnity Insurance (PII), also known as Professional Liability Insurance or Errors and Omissions (E&O) Insurance, is a type of insurance coverage designed to protect professionals and businesses against claims made by clients or third parties for financial losses due to errors, omissions, negligence, or inadequate service provided in the course of their professional duties. It is therefore an essential safeguard for professionals who want to protect their business and reputation from the financial risks associated with legal claims.
Obtaining Professional Indemnity Insurance (PII) has become significantly more challenging following the Grenfell Tower tragedy in 2017 and the introduction of the Building Safety Act in 2022. This difficulty arises from several interrelated factors.
1. Increased Risk Perception
- The Grenfell Tower fire exposed severe shortcomings in building safety regulations, particularly concerning the use of cladding materials and overall fire safety. This led to a reassessment of risk in the construction and other related professional sectors.
- Insurers now perceive a higher risk of claims, especially involving fire safety and cladding, leading to a reluctance to provide coverage or significantly higher premiums for those willing to insure.
2. High-Profile Claims and Litigation
- Following Grenfell, there has been a surge in claims related to construction defects, particularly those associated with cladding and fire safety. The scale and complexity of these claims have been substantial, leading to significant payouts by insurers
- The high-profile nature of these claims has made insurers wary of covering professionals involved in building design, construction, or management, especially if their work involves high-rise residential buildings.
3. Stricter Regulatory Environment
- The Building Safety Act 2022 introduced stricter regulations and a more rigorous safety framework, particularly for high-rise buildings. This includes new roles, such as the "Accountable Person" and the "Building Safety Manager," with clear responsibilities for ensuring building safety
- Professionals are now required to meet higher standards, with more comprehensive documentation and adherence to stringent safety practices. Failure to comply could result in severe legal and financial consequences, further heightening the risk for insurers.
4. Exclusion of Specific Risks
- Many insurers have started excluding specific risks related to fire safety, cladding, or other aspects directly linked to the Grenfell Tower disaster. These exclusions leave professionals without coverage for the very areas where they might face the most significant claims
- The market for PII has thus become narrower, with fewer insurers willing to offer comprehensive coverage.
5. Increased Premiums and Stricter Conditions
- For those professionals and companies that can obtain PII, the cost has often become prohibitively expensive. Premiums have skyrocketed, reflecting the heightened risk and the increased likelihood of claims
- Insurers may impose stricter terms, such as higher deductibles, lower limits of indemnity, and more stringent requirements for risk management practices.
6. Market Withdrawal
- Some insurers have entirely withdrawn from offering PII in certain sectors, particularly for those involved in the construction of high-rise residential buildings or fire safety engineering. This reduction in available insurers further exacerbates the difficulty of obtaining coverage.
7. Retrospective Liability
- The Building Safety Act introduces a new regime where professionals could be held liable for historical work that is found to be defective. This retrospective liability increases the potential for claims, making insurers even more cautious.
The appetite for providing Professional Indemnity Insurance has indeed diminished, particularly in sectors affected by significant losses and high risk, like construction and building safety. Insurers are pulling out of the market or significantly scaling back their offerings due to the financial impact of recent claims, the heightened risk environment, and stricter regulatory demands. This has made it increasingly difficult and expensive for professionals in membership sectors to obtain the coverage they need.
This is a difficult area of insurance but the PCA consider that insurers and underwriters need to be more understanding to specific risks associated with a particular professional service. Assessment of a risk for a high rise development is significantly different to a structural waterproofing design on a below ground structure therefore comprehensive PII policies with limitations and exclusions appear no longer a practical product.
The PCA is undertaking a review of this area on behalf of our members and will provide further updates to the protection of our professional reputation. Furthermore at our forthcoming 2024 Structural Waterproofing Conference on Thursday 19 September at Telford the topic of Insurance and when things go wrong: Latent Defects introduced by Alex Lyons of London Belgravia Brokers will provide further insight into this of your profession.
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