After enjoying a 15 year-soft market, many companies in the construction sector are now struggling to obtain comprehensive professional indemnity insurance cover. Building contractors, multidisciplinary consultancies and other professionals are all facing similar difficulties and, as cover is written on a claims-made basis, liabilities arising out of past projects are as much of a concern as current and future projects.
In these testing conditions, risk managers need to not only maximise insurance cover for past works when renewing insurance on more restricted terms, but also to minimise the risk of being left without cover both when entering new construction contracts.
Restrictions on cover
Professional indemnity insurers underwriting design & construction risks have been hit by heavy claims for several years running, and this has led to certain insurers reducing capacity, while some have exited the market entirely.
The Grenfell Tower disaster has become a costly catalyst for the challenges faced both by insurers and their insureds. Not only are premiums escalating but most insurers are now also seeking to restrict cover. New exclusions intend to remove cover for a host of claims, from those involving combustible aluminium cladding materials, through to claims arising from a failure to meet the applicable fire regulations.
The long-standing exclusion of cover for claims for breach of contractual warranties has also taken on a particular significance following the 2017 Supreme Court decision in MT Højgaard A/S v E.ON. The exclusion does not apply to liability that would have arisen anyway in negligence, but this did not assist a contractor that had entered a contractual obligation to design foundations for a wind farm to have a 20-year lifespan. While the contractor correctly followed published industry standards, unfortunately, the standards contained an error. Consequently, the design was flawed and would not have lasted 20 years, leaving the contractor liable to the employer but without insurance cover because it was not negligent.
Insurers are acutely aware that similar risks may arise in other areas, such as cladding claims if the ongoing enquiries reveal flaws in the cladding or fire containment system standards used over the last decades. In fact, a recent investigation conducted by BBC 5 live found that many of the 1,700 buildings identified as “at risk” in England are likely to fail new tests into cladding and building materials.
Liabilities arising from past projects
Given the narrowing cover in the current climate, it will generally be in the insured’s best interest to attach as many claims as possible back to older policies by notifying ‘circumstances’ that may give rise to those claims.
However, it is prudent to note that clauses allowing claims to attach to circumstances notified during the policy period can have subtle differences. The policy may require notification of circumstances that ‘may’ give rise to a claim, which sets the bar very low. Alternatively, it may require notification of circumstances that are ‘likely’ to give rise to a claim, or indeed circumstances that are likely to exceed half of any underlying cover or excess. In each case, ‘likely’ means a greater than 50% chance of a claim being made. Depending on the language used, it may also permit (but not require) the notification of other circumstances, with subsequent claims deemed to attach to that policy.
It is relatively common for insurers to ‘accept’ or ‘reject’ notifications of circumstances, particularly where the notification appears to be broad in nature. In reality this has little effect on cover for a later claim. On 13 May 2019, in Euro Pools v RSA, the Court of Appeal commented that an insured can notify a problem in general terms without fully appreciating its cause or its potential consequences. The insurance will then cover claims are causally connected to the problem notified. Whilst the outcome will depend on the precise language not only of the policy but of the notification, there is scope to challenge early ‘rejections’ when a claim arises. This includes the rejection of blanket notifications of a particular issue, such as the use of combustible aluminium cladding across a number of projects.
Where an issue that affects multiple projects does arise, the approach that an insured should take to aggregation is less clear cut. For example, replacing the cladding on a tower-block will cost millions of pounds before even considering consequential losses. If multiple claims are aggregated, there is a real risk that all available cover may be exhausted.
Whether this is the case or not depends first and foremost on the language used in the policy. However, as the Supreme Court made it clear in AIG v Woodman, the specific facts of the claims are equally relevant. “Originating cause” is a broad term that can be used to aggregate many claims. However, it is not decisive on its own. One party could argue that claims across multiple projects aggregate as they arise from the same systemic error (i.e. the originating cause), at the same time as the other argues that the design decisions made in each project were independent of each other and thus did not aggregate. Both arguments are credible.
Insureds facing multiple high value claims arising from a systemic issue should consider carrying out a scenario-planning exercise across potential exposures with a view to maximising the insurance cover available. If there is sufficient vertical cover for all claims, insureds may be content to accept that the claims aggregate, particularly if there is a sizeable deductible. However, if the potential exposure is high, it may be less risky to argue that the claims do not aggregate where the policy is written on an “any one claim” basis or is subject to reinstatements. This may result in multiple deductibles but will increase the overall amount of cover available.
Taking a robust position on both notification and aggregation is of particular importance if exclusions on later policies will prevent the contractor from spreading its losses across multiple years.
Avoiding risks in future projects
Both the Grenfell tower fire and the MT Højgaard A/S case have shown that designing projects in accordance current standards does not guarantee that there will be no liability for that design in the future.
To avoid potential arguments over whether errors in a particular design are covered, contractors should ensure that contractual commitments run back-to-back with insurance cover. In the past, there may have been scope to obtain cover for the risk that the design would not be fit for purpose, but in the current market conditions this is normally unrealistic. In that case, a cautious contractor should limit their contractual obligations to the design being in accordance with (named) industry standards or in compliance with best practice at the time.
Issues to consider on renewal
‘Circumstances’ clauses are frequently drafted as an extension of the provision on notification of claims. It is common for those clauses to focus on when and how the notification ought to be made to allow the insurer to react appropriately. However, this does not always provide the insured with the protection they deserve.
There is a careful balancing exercise to carry out. The use of policy language that is permissive and allows the notification of circumstances that ‘may’ give rise to a claim, in addition to any mandatory notification requirements, can assist with this widest attachment of future claims. However, use of the term ‘likely’ may reduce the risk of future insurers arguing that notification ought to have been given to an earlier policy.
Care should also be taken in relation to exclusions for claims which could potentially attach to previously notified circumstances. Ideally the exclusions should be limited to claims where cover has been accepted by a prior insurer. Whilst this may result in a dispute over which year of account and which insurer should have accepted cover, ultimately only one of the two can succeed in arguing that the claim is not theirs to deal with, subject to other terms of the policy.
Irrespective of the language used, if on renewal there are new exclusions of cover, the insured would be wise to carefully evaluate their historic portfolio of projects and assess whether there may be any potential claims which could also be subject to those exclusions. If there are, and if the exclusion cannot be negotiated away in this market, a carefully framed notification of circumstances ought to be given prior to expiry.
For complex construction matters, a description of the symptoms will often be more effective in forming a hook for future claims than speculating about the cause of a potential loss, unless that cause is well established.
Given the current market challenges, it is important that risk managers allow appropriate time and energy for their renewal and seek advice from their specialist insurance broker on how best to approach their ongoing risk management programme.