Impact of climate change on claims against construction professionals

Climate change and environmental catastrophes are now a common theme in daily news. The much publicised report on climate change from the Intergovernmental Panel on Climate Change has suggested that we are closer to the environmental point of no return than leading scientists had previously contemplated, with human activity changing the climate in unprecedented and irreversible ways.

The physical evidence of changing climate has been frequently seen this year. Wildfires in Greece have caused mass evacuations this week, with unpredictable winds and high temperatures fanning the flames, whilst June and July saw record temperatures sweeping the North West of the USA and Canada and temperatures of 52°C (more than the human body can withstand) reported in Pakistan. Extreme weather can have tragic consequences as we have seen in Northern and Central Europe where over 200 people have been killed by flash floods.

Statistics from insurers suggest an undeniable upward trend in catastrophic events, with Munich Re reporting an increase from 250 catastrophic events in 1980 to 980 in 2020.

Meteorological events and tropical cyclones, in particular, accounted for around 70% of insured losses due to natural catastrophes in 2019. The data for 2020 will be most interesting and early indications from Munich Re for 2021 suggest that, following recent floods in Europe, claims expenditure will be in the “mid-three-digit million euro range”.

International targets

Climate issues are being acknowledged internationally, most prominently with the signing of the Paris Agreement by 191 countries to date. The Paris Agreement aims to reduce emissions in an effort to reduce global warming and contains a commitment to hold the rise in global temperature to below 2°C above pre industrial levels. This will be no mean feat.

In April 2021, the UK Government set a world-leading climate change target, aimed at cutting carbon emissions by 78% compared to 1990 levels by 2035, with the aim of achieving net zero by 2050. With such ambitious targets, many sectors are going to be called upon to adjust how they work. Those involved in design and construction will have to make changes, particularly in light of the UK Green Building Council’s suggestion that the built environment contributes around 42% of the UK’s total carbon emissions.

Professional indemnity claims facing construction professionals

It is clear that potential exposure to climate change related professional indemnity (PI) claims against construction professionals is likely to fall into one of two categories:

Claims against those involved in developing innovative methods of saving energy and reducing our carbon footprint

These claims are more likely to arise in the renewable energy space, where PI claims have already started to gain traction. This is likely to be a result of having no, or limited, experience of designing and deploying these new technologies, without historical data or designs on which to rely.

The case of MT Hojgaard v Eon [2017] is one of the most high profile PI claims against those involved in the renewable energy space and concerned new wind turbine technologies. An incorrect formula in an international standard for the design of offshore wind turbines resulted in €26 million in costs for remedial works and subsequent litigation to decide who was liable to bear the risk of the error in the international standard and therefore pay the costs. The contract between the parties provided a “fitness for purpose” obligation and the requirement that the design life of the wind turbines would be 20 years. The Supreme Court decided MT Hojgaard, which was engaged by Eon to design, manufacture and install the foundation structures for the wind turbines, owed a contractual duty to ensure the design life of 20 years and that it had breached that duty, notwithstanding that the incorrect international standard relied upon did not provide for this length of time.

The case demonstrates the issues facing construction professionals, particularly those who have to rely on new and relatively untested technologies. Waste to energy, solar energy and hydroelectric energy sectors are also likely to see claims as they gain popularity as alternative energy sources to fossil fuels.

Claims for misrepresentations, mistakes or failures to take account of climate change related events when designing and constructing buildings

Claims in this category are also increasing. In 2013, the issues with the Walkie-Talkie building at 20 Fenchurch Street, which resulted in melting cars, eggs frying on the street and significant fire risks for local business, highlighted how claims of this nature may manifest in real life. The design of the building caused a “death-ray”, focussing a ray of light onto the street below with temperatures reaching 117°C. The building itself was affectionately dubbed the “Walkie-Scorchie” and the “Fryscraper”. Astonishingly, the architect had previously designed buildings with similar issues but did not consider it would be an issue in London as he did not think it would be so hot there, going so far as to say that climate change was the reason for the discrepancy.

Failures such as these can have costly consequences and construction professionals will fail to take into account climate change and climate change related events at their peril. RIBA Principle 2 and the ICE Code of Professional Conduct, require architects to “strive to protect and enhance…the natural environment” and engineers to “show due regard for the environment and for the sustainable management of natural resources” and have regard to the wellbeing of future generations, respectively. Stricter regulation of environmental building standards is inevitable.

Construction professionals must take into account more frequent and more severe weather, floods, resultant cracking and subsidence, as well as rising sea levels and water tables. This must be balanced against a background of trying to win work and stay competitive on price whilst avoiding over-design. An issue particular to the UK construction sector is the alternating periods between heavy rainfall and drought which raises the risk of subsidence and heave, as well as flooding. Those designing and constructing buildings face obvious risks in dealing with these idiosyncrasies.

Surveyors too are likely to face claims where property portfolios lose value as flooding spreads and assets become “stranded”. As more extreme climate events occur, it is inevitable that, as the construction sector adapts to take them into account, construction professionals are likely to see more frequent claims falling into this category.

Future issues

On a more positive note for insurers, construction professionals are already starting to use and understand greener materials, methods and technology. This is not surprising given that the environmental impact of projects is becoming a focus for many developers and planners, with future tenders and appointments likely to be won based on planners’ and clients’ requirements for green, renewable and carbon neutral buildings. It seems likely that, in the near future, developers will expect carbon neutral guarantees from their designers and contractors. Failure to meet those guarantees will result in claims (although, often, of course, liability arising from warranties/guarantees is excluded from cover).

Buildings themselves emit greenhouse gases at all stages of their lifecycle and are estimated to be responsible for between a third and a half of total global CO2 emissions. Given the ambitious targets set in the Paris Agreement, and even more ambitious targets set by the UK Government, the construction industry must adapt.

The industry can tackle these issues by looking to reduce both operational and embodied carbon. Operational carbon is the carbon emitted during the “in-use” phase of a building, as a result of energy consuming activities including heating, cooling, ventilation and lighting, as well as the use of appliances. Embodied carbon refers to the carbon used to produce, procure and install the materials in the buildings, as well as the emissions involved in its maintenance, repair and ultimately demolition.

Until now, the construction industry’s focus has been on reducing operational carbon through the introduction of building regulations, planning regulations and sustainability assessment rating schemes. Invariably, those involved in designing building now consider ways to make buildings more energy efficient.

The next great challenge for the industry is to reduce embodied carbon. As part of this, the industry is being encouraged to take a whole life carbon approach to construction and to balance the carbon cost of installing greener materials against their operational carbon footprint.

Comment

Inevitably, innovation and new approaches, often involving complex calculations and a significant degree of crystal ball gazing, will lead to mistakes and consequential remedial works, at the expense of PI insurers. Construction professionals must therefore be encouraged to stay up to date with regulations, climate change technology and innovation. Most importantly, to make sure they are properly considering the risks when designing climate resilient buildings and recording their decisions so that the project team is aware.

Read other items in London Market Brief - September 2021

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