Top 5 risks affecting architects and engineers in 2023
The risk landscape for the Construction industry is one of continuous change with both economic headwinds and legislative changes providing unique challenges to insurance and risk management. We highlight 5 of the Top Risks affecting both architectural and engineering sectors this year.
Your broker’s role in client advocacy is more important than ever. Whilst not all risks can be mitigated by insurance, our specialist Construction and Property PII team will work in partnership with you to ensure we identify, evaluate and advise on risks to improve your competitiveness and business resilience.
One vital element of risk management is ensuring that where you are performing services, you are doing so on reasonable insurance supported terms. At Howden, our in-house Legal, Technical and Claims team provide a contract review service, reviewing appointments, collateral warranties, novations and other similar documents with the aim of removing or highlighting areas which are onerous and/or may exceed the cover available under professional indemnity policies.
Below, we highlight 5 of the Top Risks affecting both architectural and engineering sectors this year. If you would like to know more about how we can help your business meet these challenges please get in touch.
There continue to be significant economic pressures being faced by some building and engineering contractors, whose profits and ability to operate are particularly susceptible to increases in the prices of materials, labour and also, now, energy costs. This means there will undoubtedly be increased instances where such firms enter liquidations, whether voluntarily or otherwise, particularly where they may be facing significant claims. This could occur whilst a project is ongoing, or after completion of the project.
For architects and engineers, this can lead to a ‘last man standing’ scenario if they are the last remaining party on the project carrying professional indemnity insurance (PII). In this situation the claimant may seek to recover any losses that would otherwise have been attributed to the contractor on the project. This is due to all the parties on a project being jointly and severally liable for losses. It is not uncommon for the boundaries between workmanship and design issues to become blurred and in the absence of a contractor (and their insurance), claimants are likely to increasingly seek to push their claim toward the architectural and/or engineering practice.
Bio-diversity Net Gain/Sustainability
It is likely that from November 2023, following changes to the Environment Act 2021, a new condition will be introduced for certain developments. This will apply to the planning permissions granted and specify that the development must have a Biodiversity Net Gain of 10%.
As is common with any requirements placed on developers and/or developments, it is likely these requirements will be included within the appointment contracts for architects and engineers. This is in order for developers to have a contractual route in which to bring a claim, should a development fail to achieve these results. Firms should be particularly careful when agreeing their obligations around this area within these appointments so they can make sure such obligations are not onerous to the extent where their PII is jeopardised in the event of a claim.
Along a similar vein, there is a greater push to develop more sustainably (e.g. for projects to achieve a particular BREEAM rating). As above, firms should take particular care to ensure obligations within their appointments are reasonable and achievable as these areas are fertile grounds for claims.
Rising costs and delays
Over the past 18 months, projects have not only seen significant increases in the cost of traditional building materials but also encountered substantial issues sourcing such materials, with a dramatic increase in lead times from what the market is used to. These increases in costs have particularly impacted traditional materials, such as steel (where prices have increased by 80% since 2020). Further to this, lead times for some materials have increased from a matter of days, to weeks.
As a consequence, there is an increased risk of claims arising from projects where either the original programme or budget has been exceeded, particularly where the tender or subsequent contract did not contain adequate provisions for dealing with such circumstances.
A further risk arises in situations where it is necessary to source and use non-traditional materials, for example due to delays or pricing. This can result in claims where it later transpires that these materials do not have the durability, safety or other similar factors that were requested, as they may not be as well tested when compared to more traditional alternatives.
Building Safety Act Limitation
The Building Safety Act received Royal Assent in April 2022, with sections of the Act having come into force in June 2022. The Act has imposed a number of additional duties on parties undertaking work on certain buildings, in particular under the Defective Premises Act 1972. Further to this, the Act has extended limitation periods for certain claims brought under the Defective Premises Act of up to 30 years for retrospective claims.
Whilst the effect of these new provisions on claims is yet to be fully realised, it is anticipated this will lead to a greater number of potential claims against firms. In particular, claims that prior to the act would otherwise have been out of time.
This issue of additional claims is further compounded by the limited insurance cover currently existing in the market, particularly when it comes to areas such as fire safety and/or cladding. Due to the timeframe available in which to bring such claims, this also raises the question of whether practices have files available on projects to enable them to realistically defend a claim brought under these new provisions.
A cautious PII insurance market
The hardening of the insurance market for firms has subsided in recent months with most firms experiencing a much more positive PII renewal. Some elements of cover, previously excluded or restricted, are improving in some areas. That said, there is still a danger that increased claims activity, caused partly by legislative changes, systemic issues (such as materials and wage inflation), combined with recessionary factors may produce a greater number of claims in the sector generally over the coming year.
These factors and subsequent claims may create further uncertainty for insurers who are already hesitant to offer cover to some firms who undertake what are traditionally considered ‘risky’ areas of work, or alternatively, dissuade insurers who are considering re-entering the PII market from doing so. Insurers may continue to restrict cover in key areas such as fire safety, basement works, swimming pools, etc.
Firms will need to ensure they have appropriate and robust risk management measures in place to mitigate the gaps present in the insurance such as regularly reviewing the services performed against insurance cover available, staff training and ensuring appointments with clients are on reasonable terms.
Associate Director – Legal, Technical & Claims