The hardening of the construction Professional Indemnity market is now being seen in practice, with restrictions in cover having a serious impact on many companies and professionals in the industry. For some it may become unsustainable to stay in business, while those who can still procure PI insurance will face higher premium costs as well as restrictions in cover and higher excesses.
The Construction Leadership Council (CLC) survey results, published in March 2021, indicated that PI insurance premiums increased almost four-fold at the last renewal, having doubled the year before.2 This issue is essentially dividing construction firms into two camps—those who are willing and able to procure appropriate PI cover to undertake higher-risk projects, and those who are not.
A quarter of the CLC survey respondents said they had lost work due to having inadequate PI cover, and it has also forced the same number to change the nature of their work in order to continue trading. Plus, many employers and their legal advisers are continuing to include contractual requirements which are simply not possible to comply with in the current market, and whilst some are willing to compromise, many of them are less flexible, which causes additional challenges to contractors.
The PI stumbling block
In the wake of the Grenfell Tower tragedy, policies initially increased excesses or excluded cladding entirely, but over the last 12 months, this restriction has become more onerous and now excludes any kind of fire safety.
Given the increasing demand for the construction of safe new buildings and the remediation of existing buildings to make them safe, this stumbling block remains a challenge for construction companies and developers who have essential work to do. If PI insurers won’t cover these vital projects, it could be seen that exclusions and restrictions have gone too far—and there will need to be a way forward for PI to become more accessible in order to avoid a stagnation of the market.
Whilst it will likely remain a challenge for some time yet, there are still ways for construction companies to obtain some cover to secure contracts and protect their business, as well as controlling costs, where possible.
Tips for procuring cover
A key consideration when obtaining Professional Indemnity insurance in challenging market conditions is to take the time to engage positively with the insurance market when presenting your risk.
Here are some points to consider to help ensure you get—and keep—appropriate and adequate cover for your business.
Start the renewal process early: Engage with your broker early to give insurers enough time to understand your risk profile and refer risks to senior underwriters, where required. Insurers are asking more questions and requiring more detail, so gather your information in plenty of time. Be prepared to fully complete detailed questionnaires even when they are not entirely relevant to your business, and include supporting documentation giving evidence of the steps you take to mitigate risk.
Notify losses as soon as possible: Remember to notify any losses or circumstances that could give rise to a claim as soon as possible, to prevent the risk of an insurer declining a claim, or invalidating the policy on the lines of non-disclosure.
Be thorough: Read any proposed contract and ensure that there are no unusual or onerous contract requirements in there which make you responsible for areas you would not normally be involved in. For example, if you are not doing the design, do not accept responsibility for the design. Also check the limits of indemnity required are reasonable for the size of the contract and ensure that the only liability you accept under contract is on the same basis as the cover your PI insurance provides.
Don’t overlook sub-contractor liability: If you decide to go ahead because of the potential commercial benefits of a project, it is essential that you understand that you might be exposed to liability which is uninsured. If you are sub-contracting the design out to others, ensure you have a full copy of their PI insurance and check with them that they maintain it regularly.
Maintain a PI policy after project completion: PI policies are written on a ‘claims-made’ basis, so it is important that cover is in place at the time that the claim is made—even if the error or mistake was made months or years previously. As PI is a long-tail class of business, it is common for resolution to happen several years after the inception of the policy, and any losses remain on the insured’s experience through many renewals, with any reserve increases over time likely to affect underwriter confidence further. Most construction contracts also have a requirement that PI insurance is maintained for 10 or 12 years after Practical Completion so failure to continue to insure could also be a breach of contract if you do not renew your policy.
The importance of a specialist broker
Gallagher’s expertise in the construction sector together with our strong relationships in the insurance market means we have a deep understanding of the aspects that can influence insurers’ view of a risk. It also means we are also able to engage at a technical level with insurers and their engineering representatives.
If Gallagher is already your broker, be assured we will continue to provide the expertise and advice to help ensure adequate Professional Indemnity cover for your business going forward. We will work with you to help you demonstrate to insurers that you have a strong internal risk management framework and a solid understanding of market developments in order to achieve a satisfactory outcome at renewal.
If you don’t yet have a relationship with Gallagher, we can conduct a confidential review of your current insurance programme arrangements and organisation’s exposures. We can then work alongside you for renewal to help ensure you secure PI cover that is sufficient for your needs in this challenging market.