The first two months of 2022 have seen a rapid series of interventions from the UK Government addressing the cladding and building safety crisis. Those interventions cover policy announcements, a Financial Conduct Authority (FCA) investigation and, most recently, the publication of draft legislative changes that substantially alter the legal framework in this area.
These developments, following closely on from interventions targeted at developers and manufacturers, will need to be closely monitored by construction insurers as well as other stakeholders. In this article, we summarise some of these key developments and assess their impact in the medium-term for the UK construction insurance market.
January 2022 - developers and manufacturers
Responsibility for meeting the growing cost of remediating buildings continues to be a contentious area of public policy. January 2022 saw Michael Gove, the Secretary of State for Levelling Up, Housing and Communities, scrap a plan by his predecessor, Robert Jenrick, to require leaseholders to pay for the cost of fire safety repairs in residential blocks of between 11m-18m in height.
|In its place, the Government has set a deadline of early March 2022 for developers to agree a fully funded plan of action, including remediating unsafe cladding on 11-18 metre buildings, currently estimated to be in the region of £4 billion.
Developers have already raised objections to the proposals. The Home Builders Federation (HBF) has, for instance, drawn attention to a purported lack of cost controls within the UK Government’s Building Safety Fund and the Private Residential Aluminium Composite Material (ACM) Cladding Remediation Fund. This suggests that the sums applied for and awarded through the fund appear to be abnormally large or have generated ‘betterment’ beyond the remediation necessary to make buildings safe.
The HBF has also publicly announced that it is considering its position on the legality of the proposals, which target only UK home builders who are already working on their buildings and not foreign companies and investment vehicles “responsible for a large proportion of the remaining buildings that require remediation”.
|Nonetheless, the HBF has issued an initial response to the Government, which provides that they will resolve fire safety concerns on buildings over 11m, remediate buildings dating back to 1 January 2000 and withdraw from the Building Safety Fund.
In exchange for these proposals, the HBF has requested that there be "no further call on our members in respect of these issues, except insofar as is currently enshrined in law". It remains to be seen whether the HBF’s proposals will be sufficient to prevent further action from government.
The FCA and CMA insurance investigation
At the same time, insurers and brokers across the UK have been recipients of ‘Dear CEO’ letters issued by the Financial Conduct Authority (FCA). These letters have started an in-depth review by the FCA and the Competition and Markets Authority (CMA) of the availability and cost of buildings insurance, specifically for multi-occupied residential buildings.
The review was commenced at the request of the Secretary of State’s letter, who in a letter to the FCA made clear that:
The FCA’s letter to insurance firms drew attention to the issue of ‘fair value’. In particular, it reminds firms of their obligations to consider the costs borne by leaseholders when determining whether a product is ‘fair value’. In light of these statements, the focus of the regulatory investigations into the buildings insurance market is likely to be conducted according to the FCA’s Product Governance Rules, specifically its rules concerning the manufacture of insurance products (FCA Handbook PROD 4.2).
The investigation, commenced at the request of the Secretary of State, reflects the UK Government’s policy, which expects the insurance market to play a part in alleviating the cladding and building safety crisis. The FCA possesses wide enforcement powers, including the ability to levy criminal, civil and regulatory sanctions against firms and individuals, although no suggestion has yet been given as to the sanctions the FCA or CMA may ultimately have in mind.
The shift in government policy towards increased responsibility for building safety defects, has been substantially strengthened by the publication of important new amendments to the UK Building Safety Bill (the Bill). The Bill is the UK Government’s flagship piece of legislation, published in response to the 2017 Grenfell Tower disaster, which aims to reform and strengthen the regulation of the building and construction sector.
- The introduction of highly unusual alterations to certain limitation periods for building safety related claims.
- Power for the Government to prevent developers who refuse to contribute towards the costs of fixing unsafe cladding from obtaining planning permission or building control approval.
- A provision for legal action to be taken against manufacturers of defective cladding products. The power will have a 30 year ‘claw-back' period and doubles the standard statutory limitation period.
- A legal commitment that no leaseholder living in medium or high-rise buildings will have to pay for the removal of cladding.
- The power to impose Cost Contribution Orders on manufacturers who have been prosecuted under construction products regulation.
- An obligation on developers of buildings over 11m to pay in full for historic non-cladding building safety issues.
- A provision that, where building owners do not have the resources to pay for non-cladding costs, leaseholders will be protected by a financial cap. The cap will be set at £10,000 for homes outside London and £15,000 for homes in the capital.
- Powers for the High Court to issue building liability orders against corporate bodies that has been dissolved as well as entities associated with the original company. This amounts to a lifting of the corporate veil rarely seen in English law.
|The draft amendments will now be subject to review in Parliament, with scrutiny continuing through March 2022 in the House of Lords, before the anticipated passing of the Bill into law later in 2022. There is possibility for some of these provisions to encourage further claims to be made against different categories of insurance policies.
The early months of 2022 have witnessed a series of dramatic and largely unexpected building safety developments. The construction and insurance industries would be forgiven for being surprised by the rate of change on three fronts:
2 Financial Conduct Authority/Competition and Markets Authority investigations.
3 New legislation.
The landscape for those connected with building safety has drastically shifted and insurers in particular will wish to consider not only the significance of the FCA/CMA investigations, but also be mindful of their wide powers of enforcement.
Manufacturers of cladding products should take steps to consider their potential exposure in terms of both financial contributions to remediation schemes and increased numbers of legal claims resulting from the extended limitation period, including the possibility of certain losses not being covered by insurance policies.
At the same time insurers will bear in mind the 30 year ‘claw-back’ provisions for claims to be made against cladding manufacturers and the possibility for this to encourage new claims against insurance policies. Both developments signify the first definitive initiatives from the UK Government aimed at drawing insurers more closely into a programme of building safety remediation.
2022 is likely to be a critical year for those involved in UK building safety. The FCA/CMA investigation is due to report back before September 2022, by which point the Building Safety Bill may well be close to receiving parliamentary approval.