Having insurance is one of life’s necessities, whether it’s for health, travel or home: it’s always better to be safe than sorry. This is no different for the construction industry. Following some high profile claims in recent years we are seeing premiums go up while liability limits are coming down, potentially impacting on client’s development risk profile.
At present, this has largely been influencing Professional Indemnity (PI) policies, which are taken out by designers to protect against claims for design work undertaken on behalf of a client.
It is typical for contractors, designers, consultants and sub-contractors to carry this insurance, but in a world where lessons have been learnt the hard way, insurers are realising the risk is greater than first anticipated and consequently premiums are rising.
In some cases insurers have pulled out of the market altogether. In the last three years alone more than 10 firms specialising in cladding design insurance have ceased operating in this space. Those that remain have squeezed liability limits, leaving clients exposed if the worse were to happen.
These issues are spread across the PI market with mounting evidence indicating that construction PI is an area where insurers are suffering their largest losses. Data from insurance broker Lockton LLP shows that in 2017 the Lloyd’s market suffered losses of £100 million on non-US architect and engineers PI policies, which both fall under the construction umbrella.
This has had a knock-on effect. Both designers and contractors have started to limit their own liabilities via negotiation during contract agreement, making it increasingly hard for developers to obtain the levels of cover previously accepted as standard practice.
So what does this mean for the future of construction?
At this point landlords and developers are continuing to demand the high liability limits of old, but moving forward we expect they will have to be increasingly flexible on terms offered by both consultants and contractors. This could even impact on funding as funders, institutions and monitoring surveyors adjust to the new norm.
Across the market there is a growing trend for the implementation of lesser known policies such as latent defects insurance, in some cases driven by occupier requirements. Ultimately, clients should seek advice from insurance specialists who can help to identify suitable policies to fit with their appetite for risk and any other lesser known policies to consider in order to reduce their risk further.
When it comes to construction, ensuring the level of cover matches the investor’s risk profile is paramount to the future of any successful development.
