Architects Bulletin: An Overview of the PII Market
From the Grenfell tragedy to the ongoing pandemic, global and national events have recently had a huge impact on the insurance market, particularly for those working in construction.
These events have sped up the deterioration of the ‘soft market’ that had in the last few years already begun to harden. Many insurers have paid out large sums in claims towards the investigation and ultimate replacement of building cladding identified as being defective following Grenfell, causing substantial deterioration to their profit margins and increasing the loss ratios of their portfolios.
The initial target of these claims were the contractors and their sub-contractors who were responsible for the installation of the cladding systems. As claims have progressed and developed through litigation Architects and to a lesser extent Surveyors and Engineers, have been brought in as developers and their insurers have sought to decrease their own exposure by pursuing contributions from the other members of the design teams.
In response to this many well-known insurers have withdrawn from the sector altogether, with others only considering renewals for existing clients. In order to mitigate their losses insurers have attempted to pass some of these losses down to their policyholders in various direct and indirect ways, which we will discuss further below.
So how has all this affected you as a policyholder?
- Your choice of who you are insured with has possibly diminished, and you may find yourself no longer able to work with your favoured claims handler at your prior insurer. Your new insurer may have procedures in place that you find challenging or confusing, or your policy may now be underwritten by a number of insurers who are spreading the overall risk between them.
- Your premium will almost certainly have increased and premiums are likely to continue to rise in the short to medium term given the current economic climate and particularly until the amount being paid out in claims across the sector as a whole significantly reduces.
- Your insurer may have included new onerous policy terms that limit or exclude cover. This can range from increased self-insured excesses to partial or full exclusions as insurers attempt to limit their liability under PI policies. Policy endorsements such as the one below are becoming increasingly common and are written to not only exclude notifications arising from cladding issues, but also any other matter that insurers consider could be related to fire safety of a building. A lack of definitions within wordings and endorsements mean that many of these exclusions cannot be properly evaluated until the wording is tested by a notification, creating uncertainty as to the correct extent of cover
“This policy shall not indemnify the insured for any claim, circumstance, loss, liability, cost, expense or defence costs, or part thereof, arising in respect of or in any way related to or in connection with the fire safety of any building.”
Matt Farman, Divisional Director at Howden commented that “We are facing the most challenging PI Insurance Market that we have seen in more than 30 years. The pool of insurers that are willing to write construction PI has reduced significantly and those that are still writing have reduced capacity (the amount of premium they are able to write in a 12 month period). It is vital that policyholders present a strong renewal presentation to insurers, well in advance of renewal, which demonstrates the quality of the risk profile of the business to help distinguish them from other firms”.
So what can you do to protect your firm’s own position and ensure that your PI policy provides the cover you need? In October 2020, the Architects Registration Board updated its guidance in relation to Fire Safety Exclusions, which can be viewed here. Key recommended steps include:
- Being cautious before changing insurer purely for the benefit of cheaper premiums.
- Preparing your application for insurance well in advance of renewal.
- Demonstrating an understanding of your business and risk-profile.
- Producing a claims history document that is up to date and accurate.
From our own experience, keeping an accurate and up to date record of what has been notified and when is vital, particularly if a “circumstance” is defined in your policy wording as needing to be “likely” to give rise to a claim in order to be notifiable.
Some insurers have been pushing back and rejecting notifications on the basis that there is not at least a 50% chance of a claim developing (Layher v Lowe  Lloyd's Rep IR 510). If you move insurers, and a Fire Safety matter develops that has already been notified and rejected as not being a notifiable circumstance, you and your broker will need to be able to evidence exactly what has previously been notified to try and obtain cover under the first notified policy. This is because although the matter might now meet the threshold of a circumstance (under either a “may” or “likely” wording), your new policy might include more onerous terms that specifically exclude these sort of circumstances from cover.
Your PI broker should be there to support and assist you in dealing with your insurers, should there be any potential issues with cover.