The construction cover crisis: what we know so far and what next?

As more and more private building inspectors cease trading, newly appointed housing secretary Robert Jenrick was last week urged by the UK’s trade body – the Association of Consultant Approved Inspectors (ACAI) to ease insurance requirements that are impeding firms from getting the cover they need.

At present only two brokers are authorised to sell the compulsory insurance to approved inspectors (AI) to oversee projects – Howden and Griffiths & Armour. But Howden’s scheme insurer withdrew from underwriting professional indemnity insurance at the end of last year.

According to the ACAI, three AIs responsible for more than 5% of live UK construction projects have ceased trading. Moreover, in the next five weeks to 21 August it says 11 more would have stopped trading. By the end of October this year, 15 in total would have been forced to stop work accounting for 15% of all live construction projects.

It follows Aedis Regulatory Services (ARS) filing for voluntary liquidation after being unable to renew the compulsory insurance policies it requires to operate. As well as the ABI calling for “urgent reforms” on the matter to provide insurers with greater confidence when underwriting PI cover for building inspectors.

But what might happen if these firms cannot get insurance they need? And how exactly is this crisis to be navigated?

State of flux

As reported today, the situation is getting worse, and contractors are now claiming they are also exiting lines of work due to being unable to source the cover they need.

Stuart Toal, casualty account manager at Allianz UK, told Insurance Times that the professional indemnity market is currently in a state of flux, with some insurers pulling out of the market and others reducing capacity or taking corrective action with segments of their portfolio.

“Construction PI is one such segment,” he said. “Ultimately there needs to be a considered underwriting approach to ensure that customers have comprehensive options however, the everchanging risks and exposures can mean pricing increases or different renewal terms depending on the case.

“Given the reduced capacity in the market it is important for brokers to engage with their customers early in the renewal process in order to manage expectations, but there is opportunity to look at excess layers across insurers, topping up the policy as it were.”

Monopoly 

As it stands, the problem among AIs is that there is a monopoly in the market with only Griffiths & Armour still selling this compulsory insurance to AIs.

Urgent meetings are being held with government officials to make the risk more commercially attractive to insurers, but so far no changes have been announced.

Insurance Times contacted all firms with policies brokered by Howden. One firm said that it had been in negotiations for a long time and had managed to secure something with Griffiths & Armour due to having a low risk profile. However, other firms, such as ARS, are so far understood to have failed in securing a new policy through Griffiths & Armour.

Underwriters frequently cite the Grenfell Tower fire in 2017 as a turning point in construction PI, driving greater concerns around the safety of buildings, and the prospect of expensive claims.

The Society of Insurance Broking (SIB), part of the CII, has subsequently produced a guide highlighting the need for brokers to be “better informed” on safe and recommended construction materials to provide clients with the right coverage.

The SIB’s chair Kevin Hancock said: “With the need for affordable housing continually on the rise, as well as the demand for high-rise buildings, there is increasing pressure to complete construction projects quickly.

“As ever, insurance brokers require a comprehensive knowledge base for their area of focus. The Grenfell Tower disaster made clear that special considerations must be made for the methods used in construction in order to provide the best and most accurate policy for each distinct project.”

Soft market

Jelf’s regional director of professions for London and the South East, Paul Wells, told Insurance Times that the market has become more difficult over the last 24 months.

He explained that many insurers were struggling to turn a profit from D&C [Design & Construct] professional indemnity insurance several years ago due to the soft market. Prices dropped, preventing insurers from making the consistent returns they needed. The recession in 2008-9 also hit the construction industry badly with many [firms] that insurers claimed money from through subrogation going bust.

Wells referenced the 2017 Lloyd’s of London results where syndicates in construction PI had a terrible year. Over the last couple of years there has also been a market wide shift for insurers in D&C in terms of where [liability] is going to sit. 

“Until underwriters have more clarity on that, my view is they are covering themselves with endorsements and exclusions in this area and very much diluting their exposure and undertaking a much more extensive underwrite on their own,” he added.

Drivers

Wells said there were two drivers, “pure economics – insurers were not making the money they need to make a profit in this sector consistently. They couldn’t underwrite the same way and be successful”. For this reason, he said it is hard to quantify the risk. He said insurers are reducing their exposure in this area.

On the other hand, he said that for clients it is a “rude awakening” after years of being used to a soft market. Clients are now finding that it is harder to get cover on the same basis as they had previously.

Giving the example of D&C PI cover being written on an “any one claim” basis, which meant that £10m was allowed for each separate claim in that year. This has shifted with insurers now only allowing £10m overall. Insurers are also now applying exclusions especially around cladding. Requirements for information have also increased. As these exclusions are quite new he said this “is why is it a very dynamic time for insurance”.

There have also been changes around fire regulations brought in by the government. But with inquiries ongoing, Wells is expecting more government intervention and therefore, due to all this uncertainty, the price of cover has gone up.

Wells added: “This is where brokers have a very important role to play in educating the clients. It means that they have a bigger part to play in the process in making sure that the client gets the cover they need.”

Jelf has been promoting stronger bonds between clients and underwriters to tackle this. Wells believes that there will be greater apportionment of liability and responsibility to risk in the future.