Sarah Brailey, Director from THB Professional Indemnity Group looks back at the effects of the Grenfell Tower fire and its implications for the UK insurance sector.
The disaster that befell Grenfell Tower in West London on the night of June 14 in 2017 was first and foremost a human tragedy. The fire caused 72 deaths and more than 70 others were injured, and the 223 people who escaped will surely never escape their dreadful memories of that night. The horrific events led to questions being raised about social housing, build quality, the emergency services and accountability at local and central government, and rocked the entire construction industry from top to bottom.
Suddenly raw materials, installation techniques, building fabric and fire protection were top of the agenda in new builds and refurbishments. And one of the principal insurance subjects following Grenfell was the focus on exterior building cladding materials and whether these comply with building regulations.
In November 2017, more than 160 social housing blocks were identified as being fitted with amalgamations of aluminium composite material (ACM), cladding and insulation judged to have failed the large-scale tests. The Government also verified that more than 280 residential buildings in the UK having ACM cladding, posed a clear fire threat. Building owners were presented with a stark choice: either remove the existing cladding or send in samples to be tested by the Building Research Establishment (BRE).
At the same time, the Government ordered a judicial review of building regulations compliance by Dame Judith Hackitt, Chair of the Independent Review of Building Regulations and Fire Safety. The 2017 interim report showed that current regulations were open to misinterpretation, leaving construction companies with the threat of legal action or costs relating to the replacing of cladding materials judged to be non-compliant.
The Effect on Professional Indemnity Policies
Professional indemnity (PI) insurance is designed to cover the cost of claims made against a company by their clients due to an error in design or failure in specification.
In this instance, unless a company is able to demonstrate to its PI insurers that they have no exposure from the use of cladding, they can expect to face restrictions in coverage, higher excesses, and sometimes total exclusions for claims stemming from cladding issues.
To say that the effect of this on the construction and allied trades sectors was of seismic proportions would not be an overstatement. Companies suddenly witnessed a dramatic increase in PI insurance rates, with the construction press noting that some insurers are upping quotes by 1000%. Other insurance providers went even further with ACM exclusions written into their policies.
New Civil Engineer Magazine reported that Insurers are asking companies to review 12 years’ worth of projects and identify the risk posed by that cladding when renewing their professional indemnity insurance on buildings. In some cases, insurers are refusing to cover these projects, leading to fears that these firms could be open to legal action if the client then decides the cladding is a risk.
Because PI policies are written on a claims-made basis, this will apply to any new claim made or potential claim advised to insurers post-renewal of their PI insurances.
PI insurers are subjecting the renewal of policies to a greater scrutiny when it comes to cladding. It does not only apply to cladding contractors; companies in the construction industry with an exposure should also be aware that they may face increased inspection from their insurers.
Insureds would gain an advantage by using well experienced insurance brokers who know the PI market well and who can pre-empt the questions that reputable PI Insurers will be asking. Insureds who have been with the same Insurer for a number of years will benefit – a term phrased “continuity” by the insurance market. An Insured who has a good relationship with their Insurer will certainly benefit when it comes to paying claims.
It is important that a company notifies its PI insurers of any probable claim as soon as possible. This becomes even more important if the company has not renewed its existing PI policy, meaning it hasn’t yet been the subject of any limitations in terms of coverage for cladding matters.
From October 2018, the Government ordered a ban on the use of combustible materials on external walls of high-rise buildings, subject to consultation. This ban will be delivered through changes to building regulations and will limit materials available to products achieving a European classification of Class A1 or A2.
What insurers need now is clarity from the Government in the form of the final report from Dame Judith to steady the market, regain confidence within the construction industry and issue clearly defined legislation that protects the industry, its insurers but above all the public from further calamities.