The Renewal Programme

Any architect or engineer who has renewed their professional indemnity insurance in the last twelve months will know that it is not as easy as it used to be. Roll back four or five years and the process was this: ignore the calls and emails from your broker until the last possible moment. Get round to completing and submitting the proposal form with updated details on turnover and claims notifications. Await the broker’s response and expect a hike in premium of around ten per cent. And depending on your appetite for negotiation, try and haggle the figure down, safe in the knowledge that any saving will not be a life-changing sum of money. Pat yourself on the back for a job well done and repeat next year.

Not so today. The insurance market has looked at itself and does not like what it sees. It particularly does not like the professional indemnity sector and Lloyds of London has warned that it has been one of the worst performing markets. The requirement for insurers and syndicates in Lloyds to underwrite PI insurance profitably again has resulted in a hardening of the market with the issue of only a limited number of policies, high premiums and the insurers less inclined to negotiate terms. The impact on premiums will vary from consultant to consultant, however an increase, for the same level of cover, by a factor between four and six times over the last year or two does not appear to be unusual. The factor is possibly greater for sectors and building types that are perceived to be particularly high risk.

All insurance policies include various conditions, exclusions and endorsements to the cover provided and PI insurance policies typically limit the insurer’s liability on pollution and asbestos along with a whole host of other exclusions ranging from property damage to radiation, war or terrorism. The tragedy of Grenfell Tower has been a catalyst for further change in the insurance market resulting in policy exclusions to limit the insurer’s exposure to cladding and fire safety. The full ramifications of Grenfell will remain unknown for many years to come but will no doubt consider how building materials are tested and marketed, the competency of everyone involved in the instigation, design and delivery of construction projects, the adequacy of legislation via the Building Regulations, the method of procurement that delegates responsibility for design, the process of checking design information for compliance, and so on. A typical PI policy will now exclude cover for anything arising from the use of Aluminium Composite Material (ACM) that are at the heart of the Grenfell scrutiny. As PI insurance is usually provided on a claims-made basis, this means that the members of a design team of a completed project that incorporate ACM cladding will not now be covered for ACM-related claims over the remaining period of liability under the contract.

Further exclusions may relate not just to the use of ACM’s but to fire safety claims as a whole and may come in the form of a total exclusion or an endorsement that limits the liability of the insurer. Fire safety is central to what design teams do. Draw a rectangle on a piece of paper that represents a building and the members of the design team will immediately look at the area and think what that means in terms of an occupancy and where to position a number of exits to comply with limits on travel distance and means of escape. They will look at the outline and ask what level of fire resistance will be required. They will look at the outline again and consider the needs of fire service access, particularly if the rectangle represents multiple floor levels. Sadly, we do not live in the perfect world where PI insurance is not needed but its purpose is to give protection against claims of professional negligence meaning that adequate cover is in the interest of both client and consultant. The thought of absence of cover for fire safety is an even greater reason for sleepless nights.

It is not just insurance premiums that have seen a dramatic increase in cost in recent years. As premiums have increased, so too has the level of excess payable by the consultant in the event of a successful claim. While this used to be measured in the tens of thousands of pounds, excess levels have now hit the six-figure mark and higher still for fire safety claims. So now, the excess payable on one successful claim could sink an SME-sized consultant whereas it would have taken a string of successful claims to have previously done the same.

Most standard professional services appointments include a requirement to maintain a minimum level of PI cover on the basis that it is available at commercially reasonable rates and terms. If the minimum cover is no longer available it may be possible to agree a reduction with a client, however, if the limit on liability remains unchanged, this may create an additional and unappealing uninsured liability for the consultant. This situation will be undesirable for the client too, but what could they do? If permitted, they could terminate the original appointment and employ a new consultant who may be less capable but is selected on the basis that they have greater level of PI cover. Of course, there is no guarantee that the new consultant will not have the same insurance challenges when their next insurance renewal comes around. Or the client could put the matter of PI cover in the hands of a contactor via a design and build procurement process where, arguably, the greatest PI risk occurs during the technical design and construction stages. Neither of these may be perfect solutions for a client as we have lost both debt-laden multinational construction companies and high-profile consultants from the industry in the recent years.

The point is that, notwithstanding the provision of PI insurance, at the end of the day it is the client who carries ultimate risk for a project and their level of risk just might have increased due to the pressures placed on consultants from the insurance industry.

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