Professional Indemnity: Cladding Risks
One of the main insurance issues following the Grenfell Tower disaster has been a renewed focus on exterior building cladding materials and whether these comply with building regulations. The UK Government has recently provided practical guidance regarding compliance with building regulations, which is undergoing review by Dame Judith Hackitt.
While Hackitt’s interim report determined that current regulations and guidance are too vague and open to misinterpretation, there have been significant concerns within the construction industry that any company interpreting the regulations incorrectly, or not in line with the intention of the guidance materials, could be subject to legal action or costs directly relating to the remediation of exterior cladding materials deemed to be non-compliant.
As of 24 November 2017, 162 social housing buildings were identified as being fitted with combinations of aluminium composite material (ACM) cladding and insulation judged to have failed the large-scale tests. The Government also confirmed that of 296 buildings (including private residential and student homes) identified as having ACM cladding, 284 use systems posing a fire threat. New data will now be published monthly by the Department of Communities and Local Government (DCLG) and will be subject to change as building owners remove the ACM cladding or send in more samples to be tested by Building Research Establishment (BRE).
The Impact on Insurance Policies
A company alleged to have breached professional duties could form a claim under a professional indemnity (PI) insurance policy. Good practice relating to PI insurance is to notify your insurer of a “circumstance” from which a future claim could arise. While the need to notify insurers should be discussed with your broker, many companies in the UK building sector have made such notifications, leading to fears of a forthcoming wave of PI claims across the industry.
As a result, companies operating in this sector could see significant rises in PI insurance rates, with the Construction Enquirer noting that some insurers are upping quotes by 1000%.
PI insurers are subjecting the renewal of policies to a great deal of scrutiny when it comes to cladding. This scrutiny does not solely apply to cladding contractors; companies in the construction industry with an exposure should also be mindful that they may face increased scrutiny from their insurers. Unless a company is able to adequately demonstrate to its PI insurers that it has no issues regarding the use of cladding, it is likely to face restrictions in coverage, increased excesses, or even total exclusions of cover for claims emanating from cladding matters. As PI policies are written on a claims-made basis, this will apply to any new claim made or potential claim circumstance advised to insurers post-renewal of existing PI insurances.
It is important that a company notifies its PI insurers of any potential claim as soon as possible. This becomes even more important if the company has not renewed its existing PI policy, meaning it has not yet been the subject of any restrictions in terms of coverage for cladding matters.