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Building control can be overseen by Local Authority Building Control (LABC) or by a private third party Approved Inspector (AI). They adopt a statutory role by assessing plans and the site to ensure Building Regulations (BR) are met.
AI’s are favoured over LABC because of the close and co-operative nature of the relationship and more efficient process. Also, generally, AIs have direct contractual links with their client allowing for claims of breach of contract. AIs can be the key to achieving compliance and sign-off on complex projects with strict deadlines.
AIs do not have the financial strength of local authorities. Consequently, Section 47(6) Building Act 1984 requires that AIs must have professional indemnity (PI) and public liability insurance from a Scheme approved by the Secretary of State. The criteria for this scheme is widely considered far too stringent and outdated. Following Grenfell, changes in underwriting appetite meant insurers withdrew from the market altogether leaving a single insurer willing to insure AIs. An increasingly risk-adverse market and reduced competition has led to:
- Significant premium increases
- Stricter restrictions and protection measures
- Extensive due diligence and questioning to better assess the risk
- Reluctance to take on new risks and
- More selective and critical approach to renewal.
If AIs are unable to renew their terms once existing cover expires then, as a matter of law, they must cease trading. If AIs are forced to cease trading en masse causing a shortage of AIs, building control will effectively act as a bottleneck and stall projects. At the time of writing, 87 AIs are on the Construction Industry Council Approved Inspector Register. The Association of Consultant Approved Inspectors, which represents over 90% of all UK private AIs, has stated that UK building control is in crisis.
AIs with insurance still in place are unable to take on projects from another AI if work has started on site, meaning these projects must refer to LABC by default. Significant costs are associated with transferring projects and ultimately homeowners, developers and contractors alike, face the prospect of having to open works for inspection if it’s not possible to demonstrate to LABC that work already inspected complies with BR.
Increased reliance on an already overstretched LABC will impede completion, add cost pressures and reduce flexibility. More importantly, some within the industry have concerns over what this may mean for safety. Ensuring that there are enough AIs will keep buildings safe and projects on time and within budget.
The government are in dialogue with stakeholders about how to address this situation. The industry is calling for the insurance criteria to be changed to become commercially attractive for insurers. The PI market has never been more challenging for AIs and the status quo will continue to cause problems until a solution is reached.
Professional indemnity gap
The UK professional indemnity (PI) market was a ‘soft’ market for a long time, with abundant insurer capacity and willingness to compete for business which saw low premiums and wide coverage.
The market has however hardened rapidly since late 2018, especially in the construction and design sector. Large numbers of insurers have withdrawn from the PI market to concentrate on more profitable lines of business. This is partly due to the natural cycle of the market but also driven by:
- Premiums becoming unsustainably low.
- Lloyd’s 2018 review which saw non-US PI claims pay-outs substantially exceeding income.
- Increasing numbers of claims and heavy losses in construction where projects are getting more complex due to the implementation of evolving technologies.
- The increasing financial uncertainty of a sector where profit margins are narrow at the best of times as demonstrated by the demise of Carillion. An insurer’s ability to recover sums from at-fault parties is less certain than ever where insolvency is such a risk.
- Grenfell caused insurers to lose confidence in the adequacy of BR upon which they had previously relied as to the efficiency of design and construction.
- COVID-19 has had an effect on capital.
Hardening conditions have left many in the construction industry facing increased premiums and excesses, more restrictions and exclusions in policy cover and, in some extreme cases, an inability to source appropriate and effective insurance protection.
Those insurers still in the market are restricting capacity and don’t want to increase their market share. The current pandemic has seen almost all PI insurers start to demand information about the insured’s contingency plan and liquidity.
Comment
Navigating the market is going to be tough. Insureds should identify their risk appetite, avoid focussing on cost and seek risk advice to ensure suitable cover has been provided which meets their requirements. The markets perception of an insured will impact on their ability to secure adequate and favourable cover so utilising a broker with the right expertise, access and influence will assist getting the best possible outcome. Insureds will also need to show that they are actively managing risk so as to reduce their risk profile and avoid leaving renewal enquiries to the last minute.
The restrictions we see creeping into indemnity cover include anything fire-related and to do with cladding. It is also becoming increasingly common for policies to have an aggregate limit of indemnity with cover on an ‘each and every claim’ basis becoming more difficult to procure. It is however not impossible and should be considered by the broker.
Insureds should be reminded of the importance of a thorough information gathering exercise and the duty of fair presentation. Providing detailed underwriting information early on will allow the broker to consider the most effective way to present the risk and allow the underwriter sufficient time to review all the information and make further enquiries. Insurers will therefore need to work closely with underwriters and brokers to manage the process. During renewal discussions, the insured should be made aware of the current issues facing the market so realistic expectations can be set early on as to what is achievable.
It is impossible to tell when the market will move back to a soft and highly competitive climate but past experience shows that a hard market will not last long.
Read other items in Construction and Engineering Brief - May 2021
Read other items in Professions and Financial Lines Brief - July 2021
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United Kingdom