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The market must work with government to make architects’ PI cover affordable

The article below, by Tom Malcolm, Head of UK Broking at New Dawn Risk, was originally published in Insurance Day in June 2021.

Even though four years have passed, issues in cladding have still not been resolved since the Grenfell Tower tragedy. Individuals and families across the UK are stuck living in dangerously clad properties that are more vulnerable to fire and have plummeted in value, nearing the point of being unsellable unless expensive remediation work is carried out.

In February, the Housing Secretary announced that the government would finally be intervening and will pay to remove unsafe cladding for all leaseholders in high-rise buildings, providing reassurance and protecting them from costs. It will also introduce measures to boost the housing market and free up homeowners to once again buy and sell their properties. This is a very welcome development for affected homeowners but does little to address the issues still faced by architects, another key group impacted by Grenfell.

Architects are unable to practice without a professional indemnity insurance policy in place that protects them against a broad range of potential risks, including professional negligence that might result in property damage, personal injury or financial loss, which might stetch back over many years. The problem is the cost of this insurance has risen astronomically to the point where it poses an existential threat to some architects.

Underpriced cover

Why exactly has this happened? To find the answer you need to look back some time. Architects’ PI insurance had been under-priced for many years prior to the 2017 Grenfell Tower fire. The tragedy (and subsequent Hackitt Report) called into question the safety of accepted design and building practices for high-rise buildings, including the use of many types of common cladding, fire-safety management and the principles and responsibility for the sign-off of any building as being ‘safe’. What this brought to the fore was a number of systemic issues with the UK’s Building Regulations regime. 

Previously, any architect’s insurer could rely on the standards and efficacy of all architects’ work being guaranteed by adherence to building regulations, but the confidence of insurers in this as a protection against large-scale claims was undermined by the failings that Grenfell Tower uncovered, including a lack of any clarity over who was ultimately responsible for a building’s safety.

Since 2017, that uncertainty, combined with multiple claims post-Grenfell, has generated fear in the insurance market, with large concerns that the liability may be passed back to the architects and thus the insurers. We have seen many insurers withdrawing from the professional indemnity market altogether. This has caused demand to far outstrip supply, driving up prices to an unprecedented level.

In addition, insurers have also put strict restrictions on the limits they will cover for any one claim, as well as excluding any buildings with ACM cladding from their cover – a significant restriction for commercial architects.

Restrictions in cover also severely limit the types of work architects can carry out, (for example basements, swimming pools, anything fire related) meaning some bread-and-butter architecture project types are becoming close to uninsurable.

The virtually universal restriction on protection for fire safety and strategy in professional indemnity insurance policies issued to architects has led to mistrust of insurers, while insurers have been obliged to take defensive action in response to brokers seeking quickly to “block notify” all projects which may in the future face a challenge to their fire strategy. The ultimate outcome in some cases, and, depending on the breadth of the fire safety exclusion, has been that some firms have had to cease practising.

A way forward

A solution to all this lies with the government. Its announcement in February included a proposal to provide a state-backed indemnity scheme for qualified professionals unable to obtain professional indemnity insurance for the completion of EWS1 forms. Our view at New Dawn Risk is that this proposal should be expanded to include a provision to provide PI insurance covering architects and engineers who specified cladding materials that were within building regulations at the time.

This fund can either be delivered in the form of indemnities directed to the architect, or, we believe more practically, via a reinsurance scheme for insurers of architects, engineers, and other professionals to carve out exposures relating to the specification, inspection and installation of cladding materials that are now deemed to be unsafe. The scheme could be administered through a commercial third-party administrator and claims would be continued to be handled by the insurance industry. Participating insurers would contribute a levy of a percentage of the premium (maybe 5%) to obtain access to the reinsurance fund and would not be permitted to exclude cover for cladding or fire safety claims. We think this will allow the PII insurers to remove the exclusions that are crippling the industry – such as those involving tall buildings, specifications of cladding, etc. – and to moderate the premiums being charged to professionals that are exposed to such historical projects.

Ultimately, this issue has underlined the importance of all parties working together. Insurance brokers and underwriters, lawyers and professional bodies should continue to engage closely to lobby local and national government to broker an effective, long-term solution that supports architects and the wider construction industry.

The original article can be viewed here