How insurers and the construction industry can work together on PII

Is the problem of professional indemnity insurance one of trust and, if so, how does the industry regain that trust? Denise Chevin investigates.

One of the many repercussions for industry in the wake of the Grenfell Tower fire in June 2017 was the inability to get professional indemnity insurance – or PII. The tragedy spooked insurance providers. Cover was curtailed and premiums went through the roof. Many firms had to turn away work or in extreme cases cease trading.

For the past 18 months or so the situation has been very steadily improving, but some sectors are still finding it hard to get cover and premiums. And although premiums have plateaued or reduced, they are still vastly higher than they were in 2016.

Insurance brokers have mixed opinions on how the situation might unfold in the next 12 months – with some being more optimistic than others. But before we talk about the prospects for PII going forward, it is useful to understand the context of the crisis.

Pre-Grenfell 

“In 2016 we were in a ‘soft’ market – rates and premiums were coming down, and there was more capacity from insurers and more coverage available for buyers,” says David Isherwood, professional indemnity insurance account executive and Senior Vice President at Lockton Companies. “That changed dramatically overnight in 2017, after the tragic fire at Grenfell. Among insurers there was a bit of a knee-jerk reaction when they realised potentially what liability they had within their construction book.

“So, they started to do two things. First, they started to restrict or, for some people, exclude cover in respect of cladding and fire safety. Then they started to increase pricing, particularly for smaller firms, making buying insurance not viable for the value of the work.” A typical rise for a medium-sized contractor was an almost three-fold premium increase.

Contract amends and cover

The Construction Leadership Council (CLC) has published a statement about industry-approved contracts being amended by clients and their solicitors to introduce terms that are onerous and/or difficult to insure.

Most contractors and consultants rely on the scope and limit of cover provided by their PII policy to pay civil liability claims brought by clients and other stakeholders.

Factor in the increasing limits of indemnity being required and there is a growing disconnect between the liability exposures faced by contractors and consultants and the insurance protection that can be secured to meet them at an affordable cost.

The CLC’s PII Working Group has identified that too often standard form contract terms are being amended to include disproportionate liabilities and obligations for the nature of the work and/or do not fall within the scope of the contracting party’s PII cover.

Read the full statement at b.link/CABE_CLC

Isherwood says that the dire market was compounded by two further factors. The first was a market report produced by Lloyd’s of London revealing PII for construction to be one of the worst-performing classes at Lloyd’s. “For insurance companies to be profitable they need to be paying out less than 85p for every pound they insure – a threshold that was not being met. Then alongside that interest rates were low, making it harder for insurers to make money from investing the cash they receive from premiums. The upshot was that a soft market had become a hard market by the time firms renewed premiums in early 2018.”

A survey carried out by the Construction Leadership Council (CLC) PII subgroup in 2021 revealed that even though two-thirds of respondents said that less than 5% of what they did was high-rise residential, almost one in three were unable to buy the cover they wanted or needed. A year later the repeated survey showed no improvement.

Restrictions on cover were particularly problematic because PII is a so-called claims-made policy, explains Samantha Peat, board advisor at Meridian Group and Chair of the CLC PII subgroup. “That means your cover today relates to work that you did in the past, and what you are doing today will create claims in the future. SMEs were the ones that got hit the most with these very broad exclusions, high premiums and high claim excesses because they didn’t really have any buying power.”

The CLC PII subgroup was set up in 2020 to bring industry and insurers together to find beneficial solutions to the PII crisis that would allow insurers to underwrite risk and make a profit, and competent construction professionals to buy adequate cover at reasonable cost, says Peat. “For example, the group held a conference at the end of January 2024 where the construction professionals were able to demonstrate to the insurance professionals that there had been a huge amount of work done to assess, improve and demonstrate competency – particularly around fire safety design.

“The optimism created from that sharing of knowledge was somewhat tempered by the concern that the Building Safety Regulator was not well resourced, and there was the potential for delays.”

What’s happening now?

The consensus is that rates are plateauing – or even coming down slightly. “There’s so much scrutiny on fire safety design now that insurers are relatively comfortable that what people do now is of a better quality and competence than pre-Grenfell,” says Peat. However, insurers might exclude any claims related to fire safety done before a certain date.

Daniel White, Sales Director and Senior Specialist at Consort Insurance, agrees that the softening market leaves scope for premium reductions. However, he adds a note of caution: “Market conditions are slowly improving, but it is an ever-changing precarious situation. The fire sector continues to be under heavy scrutiny and, as such, long-term strategies still need to be deployed to maintain consistency of cover.”

Consort works across the entire industry, but for the past five years has developed a niche specialism in the fire sector including contractors, manufacturers, engineers, fire risk assessors and everything else in between.

In terms of driving improvement, White says that more insurers are entering the market, but some new entrants are doing so with a “substandard financial rating, which is always a concern, and furthermore with substandard coverage being supplied. The most common pitfall on cover we see on a frequent basis is the removal of consequential loss cover, which plays a hugely significant part in the event of a claim.”

Another restriction introduced during the ‘hard market’ was the removal of cover on the basis of a limit for ‘any one claim’ – so if firms were insured to £5m, this would cover a number of claims of that value. This became an aggregate value instead. White says: “Returning to an ‘any one claim’ basis remains a challenge, although we have achieved this for a number of our clients.”

Isherwood put the improving situation down to insurers having a better handle on what their potential liabilities are. He says this is because most claims to do with unsafe cladding will already have been notified, even though they have not necessarily been paid. There is more certainty in terms of the fire and safety landscape because of legislation including the Building Safety Act (BSA). Another factor, he says, is the higher rates of interest, which means that insurance is getting more cash from investing the premiums. “It’s a good time for some of the insurers to come back into the market, and as a result the market has become more competitive for buyers.”

Isherwood says that firms with poor claims records will inevitably still be finding it difficult to benefit from lower premiums and rates – rates being the cost of insurance as a percentage of turnover.

He says that surveying-type work for risk assessments or for mortgage lenders comes with a higher premium for PII, because there are fewer insurers prepared to offer cover, as does cover for structural engineers. Basements – designing and construction – and swimming pools are also areas of work that insurers are wary of.

And the future?

“Over the next 12 months we’re going to continue to see a downward trend for premiums and rates because of more insurers coming to the table. So for buyers of professional insurance, I would say it’s very good news,” says Isherwood.

He says there are a couple of unknowns. One of those is the new Principal Designer and Principal Contractor dutyholder roles under the BSA, and the other is related to the Defective Premises Act (DPA), which extends retrospective liability to 30 years. “We’ve already seen a couple of matters notified via the DPA. One was a building completed in 2006, which previously would have been out of the liability period.”

As with all insurance, the market for PII cover could be affected by economic and geopolitical instability and tough trading conditions for the construction industry more widely, points out Isherwood.

The nature of PII cover is that it has joint and several liability. This means that if there is a problem on a project and many of those who worked on it have gone out of business, then those still in business are left to pick up the liability of those that have – even though they may have been responsible for a small percentage of the overall value. Because of this risk, if the rate of business failure rises then PII also goes up.

There is also the connected nature of insurance. Insurance companies buy reinsurance, which is issued by massive companies that are insuring a lot of property as well, explains Isherwood. “If there is a massive hurricane in Floria, the UK will pay more for its reinsurance premium, which filters down into what insurers charge their clients for cover.”

There is no expectation that rates will return to 2016 levels. But White strikes an optimistic note: “The changes in legislation provide underwriters with comfort that standards are being lifted; however, underwriters want to keep updated. For example, Consort runs two seminars a year that are aimed at educating the PII market on changes in legislation or updates to products being used in construction.”

Spreading greater understanding will continue to be a raison d’être for the CLC PII subgroup, which is now turning its attention to tackling over-onerous contractual liabilities – again proving problematic for PII insurance. 

It is writing a series of statements to be issued by the CLC (see Contract amends and cover). These will call on clients – including local authorities and government – to use standard contract terms with as little amendment as possible, and ask authors of standard contracts to make clear that these should be used unamended where possible, explains Peat.

“If your contractual liabilities are onerous, it doesn’t matter how competent you are – the insurers still aren’t going to be happy about the risk that you’re posing as a policyholder. So that’s what has led the group to focus its efforts on this issue,” she concludes.

CABE partnership offers tailored PII services for members

CABE is helping its members obtain the best PII cover for their work and specialisms by forging a partnership with the insurance broker UKGlobal Broking Group Limited. 

Tim Grant, Director of the Bristol branch of UKGlobal, has specialised in PII since 2008. He says the broker has developed a niche in setting up schemes for associations or for areas of the market where companies are struggling to buy cover.

Under the arrangement, CABE members have access to specialist advice and services from UKGlobal, which works on their behalf to get the best deal with insurance companies. Crucially the broker aims to gain an in-depth knowledge of members’ qualifications and experience to help insurers understand risk and offer premiums that reflect this technical know-how.

“SMEs in particular tell us that dealing with brokers sometimes feels like a bit of a tick-box exercise. They send in the form and get a quote back. We try and speak to everyone and offer advice. We understand the client when we place the cover, we’re aware of the market conditions and we can interpret the policy wordings when it comes to a claim situation,” says Grant.

It has similar arrangements with the Equity Release Council, the Residential Property Surveyors Association and the Council of Property Search Organisations. 

It is also looking to work with CABE members to help them lower premiums by improving their approach to risk management and helping them understand the concerns of insurers.

As others have observed, Grant says that the market for PII in construction and engineering has been softening and wider coverage is possible. He says that, for example, cover is becoming available on an any-one-claim basis, rather than as an aggregate limit, as would have been the situation a year ago.

“But availability is very much on a case-by-case basis based on factors like a company’s approach to risk management, together with their qualifications and the type of work undertaken. We’ve sat down with CABE to understand what specific qualifications mean.

“We then communicate that to insurers to help them understand the expertise company directors and senior staff have, which enables them to price risk on a more informed basis.

“We also want to help CABE members evaluate the financial viability of taking on projects in terms of what they might earn from a job versus the cost of cover – not just now, but the liability and insurance cost it brings further down the line.”

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