After an incredibly challenging few years, there are signs that the professional indemnity market is shifting for the construction sector. But, with changes resulting from legislation as well as shifts in insurer appetite, brokers now have opportunities to support their customers and help them arrange the right cover.
The Grenfell tragedy has resulted in new legislation, the Building Safety Act 2022, requiring higher standards around fire safety. Luke Hayne, senior financial lines underwriter at Allianz, explains the ramifications for the professional indemnity market and how brokers can support their customers.
The last few years have certainly been tough for the construction sector. Following Grenfell, capacity withdrew, and the professional indemnity market entered a testing period. Limits dropped, fire safety exclusions became standard, and insurers looked to tighten up of their extent of coverage.
Fortunately, there are signs that the market is beginning to change again. Capacity is returning, limits are increasing, and fire safety cover is being written back into some policies. For example, at Allianz, within our mid-market Professional Indemnity Select product, we offer up to £1m of cover for architects and engineers carrying out fire safety checks, on an aggregate basis.
But it’s a markedly different landscape now. New legislation, the Building Safety Act 2022, introduces new responsibilities and limits around liability. Most significantly, the limitation period for claims has increased from six years to 30 years retrospectively for completed works and from six years to 15 years going forward.
Working closely with customers to ensure they understand how these changes affect them, will help them secure the right protection. These are the four key areas brokers should be talking to their customers about:
1. What's your fire safety exposure?
As fire safety exclusions are relaxed, it’s important for customers to understand their fire safety exposure to ensure they take out appropriate cover. Fire safety cover of up to £1m is readily available now for architects and engineers, with some carriers offering up to £2m. It’s also sensible to consider historical exposure.
As the new fire safety regulations came into effect on 1st March 2019, some policies will include endorsements that leave the customer liable for any loss before that date. More comprehensive policies are available with retroactive cover offering full protection for up to 30 years, in line with the new limitation period.
Policies written through online systems should also be reviewed as these may often include fire safety exclusions.
2. How much run-off cover do you need?
Most business owners understand the importance of taking out professional indemnity run-off cover for a few years after they sell a business, merge with another company or practice, or retire.
But, while keeping cover in place for five or six years would have been regarded as sufficient in the past, the extension of the limitation period from six years to 15 years under the Building Safety Act means a rethink maybe necessary. If cover lapses before the end of the 15-year period and a claim arises, they could find themselves personally liable.
Even if found not to be at fault, defence costs can be significant.
Taking out run-off cover for 15 years will ensure a customer’s liabilities are fully protected. Some customers may be able to justify a shorter time based on their own experiences and the nature of the work they undertook but sticking to six years may not provide them with adequate protection anymore.
3. Is your customer data protected?
The increase in limitation periods also means that it will be necessary to hold customer records for longer. If a legal challenge arises during the 15-year warranty period, the original contract will be required to help determine liability.
In a world where six years is the norm for holding records, as an example, HMRC requires records to be held for six years from the end of the tax year they relate to, it will take a mindset change to adjust to these longer periods.
Holding customer data also has ramifications under GDPR. Data must be held securely and while larger organisations may use professional online storage to hold their data, many smaller companies and individuals are still turning to free online storage solutions. These may not be secure enough for customer details and, as they are free, there’s no guarantee they will be around in 15 years.
As well as alerting customers of the need to store data for this longer period, it is also worth highlighting the value of investing in professional online storage or taking advice from an IT professional. Additionally, holding customer data introduces cyber risk and the need for a conversation about the benefits of cyber insurance.
4. Have you taken advantage of added-value services?
Shifts in the liability landscape also make it a good time to flag up the added-value services that insurers offer in this space. These can help to highlight any new areas of risk and potentially even save your customers money.
A good example of this is a collateral warranty review service, such as the one offered by Allianz to its design, construction, surveyor, engineering and architectural customers. This service reviews collateral warranty contracts, third party rights clauses and novation agreements, highlighting the customer’s responsibilities. This insight can then be used to ensure they take out appropriate insurance cover or, if necessary, to challenge the terms of the warranty.
It's essential that customers understand their responsibilities. As well as the changes in the legislation, recovery from the pandemic saw many construction sector businesses taking on contracts that required them to accept additional responsibilities. Some customers may want to shy away from taking these on now, but all should ensure they understand what their liabilities are and that they have appropriate cover.
Drawing customers’ attention to these points and how the changes in legislation affect their liability will help them arrange cover that is appropriate to their exposure. It won’t always be an easy conversation, many customers are likely to see their exposure and resultant premiums increase, but the right protection will always be more affordable than finding a claim is not covered and they are personally liable.
The conversation is also likely to get easier in the next 12 months. As well as continued softening in the market, as some of the legislative changes may start to be challenged.
