As the professional indemnity insurance market hardens, architects are finding themselves saddled with higher premiums and ever-longer questionnaires. Richard Waite reports
The profession and the wider industry has had to re-examine itself in many ways in the wake of the Grenfell Tower fire. The question of liability is one of them.
An upshot of last year’s tragic fire is that the insurance market for architects has changed considerably – arguably the most significant upheaval in the sector since the economic crash.
The cost of professional indemnity (PI) premiums is going up, insurers are understandably requiring significantly more information from architects about the projects they’ve worked on and the number of firms willing to offer insurance has plummeted, with a slew of providers simply dropping out of the market.
In the summer the AJ’s sister title New Civil Engineer revealed that some consultants that had worked on buildings with cladding similar to that used on Grenfell Tower were being refused PI on their projects.
Other insurers were asking their clients to review 12 years’ worth of these kinds of projects and identify the risk posed by the cladding systems before renewing their cover.
Now the RIBA has revealed extensive details about similar difficulties facing architects.
Insurers are requiring significantly more information from architects about the projects they’ve worked on
According to the institute: ‘The PI market for architects is hardening considerably; the first big shift in premiums in over a decade.
Meanwhile, the RIBA Insurance Agency confirms there has been a ‘general increase in PI premium levels’ with ‘significant premium increases for practices with a back catalogue of high-rise schemes with rainscreen cladding’.
In addition, insurers are demanding the completion of ‘very extensive questionnaires at renewal’ for those working on tall buildings with any kind of rainscreen cladding system.
The agency claims that there are ‘especially large’ hikes in premiums for practices that have notified insurers about potential claims.
There are also confirmed cases of insurers setting limitations of cover and adding in higher excesses in relation to jobs involving aluminium composite material cladding (as used at Grenfell) and basements.
As well as the repercussions from Grenfell and the problem-riddled PFI-built Scottish schools in early 2016, the agency attributes the shift to changes in long-term interest rates affecting the ‘attractiveness of insurance as an investment vehicle’ and an increase in claims in the overall insurance market.
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This is coupled with a high number of large claims payments, many following botched basement projects, as well as a ‘significant number of large reserves in place against current “cladding” notifications’.
At one time, with potentially lengthy periods in which clients could claim for defects, insurance was often a practice’s second largest non-payroll related expense after rent. In the 1980s it was regularly 20 per cent of turnover. Although a return to those levels may be unlikely, the lower premium culture of the past few years is certainly under scrutiny.
Roger Hawkins, founder of Hawkins\Brown and chairman of the RIBA Insurance Agency, says: ‘There isn’t an insurance cliff edge here. But it is a wake-up call. There is movement, a shift in the market.
‘Those who don’t take it seriously could get caught out.’
Hawkins says insurance companies are now asking for an increasing amount of information to try and ‘understand the level of risk’.
He says: ‘Insurers are asking questions because there hasn’t been a test case yet on this – namely where architects are removed from the client, such as in a Design-and-Build case when the client has gone for a cheaper material on the suggestion of the contractor [and against the architect’s advice]. Architects need to keep good records that clearly show they didn’t specify downgraded material or were not passive [in any discussion].’
Some PI insurers have underwritten a significant amount without paying enough attention to the potential fallout that a disaster such as Grenfell has awoken
Yet the issues of combustible cladding are only part of the claims landscape. Most cases involving insurers are over more mundane issues.
‘The biggest complaint against architects is still for water ingress in buildings,’ Hawkins says. ‘So architects need to ensure they are getting their details right.
‘The cases we see the most are often quite small but based on pretty basic errors, such as buildings having to be demolished because they have been built too high due to the drawings being wrong.’
The picture of an architectural insurance industry in flux is recognised by professional indemnity expert Stewart Ruffles, a director of professional risks at Clear Insurance Management.
‘PI is one of the worst-performing classes in terms of claims vs premium, with the market softening for at least a decade,’ he says. ‘Some insurers have begun to pull out of the class due to the exposure and the low premiums charged … [we] have certainly seen rates increase and capacity lower for specialist areas such as cladding/curtain wall and basement works.
‘Some PI insurers have previously underwritten a significant amount of their book in these areas without maybe paying enough attention to the potential fallout that a disaster such as Grenfell has awoken. These insurers are now culling their book exposure to a more manageable figure and limiting their exposure by restriction or exclusion.
‘Insurers are [also] more interested than ever in the background of firms with a history of high-rise and cladding.’
Ruffles, though, sees this as a positive. ‘[The] insured have to undertake a thorough examination of their previous contracts and disclose to insurers, ensuring total transparency,’ he says.
Former RIBA vice-president Richard Saxon says the current insurance situation is ‘worrying’ for practices and the risks are not ‘fully understood by architects nor insurers’. ‘The normal cycle of rising and falling premiums has been interrupted by this major uncertainty and there is a “flight to quality”,’ he adds. ‘PI is, however, a mixed blessing as it puts each designer in a silo and inhibits collaboration. It also fosters secrecy and blocks learning from others. A long-term replacement concept is insurance-backed alliancing, where all parties are covered collectively and actively managed for risk.’
RCKa director Russell Curtis agrees that the increase in premiums and information required could trigger a shift to a new system.
‘Now more than ever it’s surely time to consider alternatives,’ he says. ‘Integrated project insurance (IPI) is beginning to gain momentum among some enlightened clients as this leads to a less adversarial, buck-passing approach, instead encouraging teamwork and collective problem-solving – surely something the industry needs right now.’ With the rise of BIM, where the model is often led by the architect, the extent of an architect’s liability could be stretched again. To avoid that, this burden should be shared and other insurance approaches should undoubtedly be looked at.
But all practices should get their houses in order now to avoid any nasty PI surprises.
Tips to try and keep your insurance low – and all eventualities covered
- If your practice has, during the past 15 years, worked on buildings over 18m in height with external cladding systems, make early contact with your PI insurers ahead of your annual policy renewal date. You may have to disclose further details of these projects as part of the renewal process.
- On Design-and-Build projects involving external cladding systems, ensure the contractor’s PI insurance policy does not have a cladding exclusion clause, and that the contractual requirements for your PI insurance are not more onerous than that offered by the contractor’s policy.
- Practices with thorough quality assurance and record-keeping, good knowledge of the materials they specify, and effective risk management processes will be more attractive to PI insurers and likely to benefit from relatively lower premiums.
Comment: Paul Berg, partner, Griffiths & Armour
Following the Grenfell Tower tragedy, issues relating to cladding and fire safety in general have led the established professional indemnity (PI) insurance market to express concern about the potential extent of exposure sitting within their portfolios.
The report from Judith Hackitt makes for uncomfortable reading for those of us involved in construction. While the problems the report identifies are many and the measures needed to address them very significant, there is a single phrase in Hackitt’s personal foreword which strongly resonates with us and the risk management messages our clients will recognise as all-too-familiar: ‘The mindset of doing things as cheaply as possible and passing on responsibility for problems to others must stop.’
A consequence is that architects along with other construction professionals are being asked to collate significant amounts of additional underwriting information as their PI policies come up for renewal. Social housing was the initial area of specific enquiry, though attention has widened to include other tall buildings, particularly those where people stay overnight.
Insurers have focused on cladding issues and fire safety in general, such as how far architects are accepting responsibility for the specification, selection, design, installation and certification of rainscreen systems – especially projects involving aluminium composite material panels.
Yet the situation surrounding the evolution of building regulations and obligations remains to be determined. The landscape is still evolving, and we are unlikely to have greater clarity until the Grenfell Tower Inquiry has concluded its investigations. For the moment, the PI insurance market is by no means co-ordinated in its response to this challenge: some insurers have declined to offer renewal to their architectural clients this year, and 2019 is likely to see other insurers withdrawing from the sector altogether. But what is clear is that each insurer is continuing to evaluate its position pending a better understanding of the facts and anticipated exposures.
Ultimately, the majority of architects who can demonstrate little or no exposure to potentially problematic cladding systems are able to renew without any restrictions on their cover. The benefit of an established relationship with the right brokers and insurers is proving invaluable and, more generally, good records and clear contractual documentation are proving to be great assets in the negotiation process.